Answer the following qustions: a. What is the present value of $8,000 to be rece
ID: 2496760 • Letter: A
Question
Answer the following qustions:
a. What is the present value of $8,000 to be received at the end of six years assuming the required rate of return is 15%?
b. An investment of $185,575 is expected to generate returns of $65,000 at the end of each of the next four years. What is the internal rate of return for the investment?
c. A project that costs $180,000 has estimated annual net cash flows of $50,000. Determine the cash payback period.
d. A project that costs $250,000 has estimated annual cash flows of $90,000 for three years. Determine the net present value of the project assuming that the acceptable rate of return is 10 percent.
Explanation / Answer
A) Present Value of $8,000 to be received at the end of six years
= 8000/(1+0.15)^6
= $3458.62
B)
Required Internal rate of return is the rate for which N.P.V of cash flow is zero
-185,575 + 65,000/ (1+r) +65,000(1+r) ^2+65,000(1+r) ^3+65,000(1+r) ^4 = 0
Thus IRR is 14.999 (approximately)
C) Project Cost = $180,000
Annual cash flows = $50,000
Payback Period = 180,000/50,000 = 3.6 years
D) Initial cost = $250,000
Discount rate = 10 %
Annual cash flows for three years =$90,000
Net Present Value = -250000+90,000*(1+0.1)^-1 + 90,000*(1+0.1)^-2+90,000/(1+0.1)^-3
= - $26,186
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