M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3
ID: 2526203 • Letter: M
Question
M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3, 11-4]
Vaughn Company has the following information about a potential capital investment:
1. Calculate the net present value of this project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round the final answer to nearest whole dollar.)
Explanation / Answer
Calculation of Net present value: Statement showing NPV Particulars Time PVf 13% Amount PV Cash Outflows - 1.00 -2,80,000.00 -2,80,000.00 PV of Cash outflows = PVCO -2,80,000.00 Cash inflows 1.00 0.8850 74,000.00 65,486.73 Cash inflows 2.00 0.7831 74,000.00 57,952.85 Cash inflows 3.00 0.6931 74,000.00 51,285.71 Cash inflows 4.00 0.6133 74,000.00 45,385.59 Cash inflows 5.00 0.5428 74,000.00 40,164.24 Cash inflows 6.00 0.4803 74,000.00 35,543.57 PV of Cash Inflows =PVCI 2,95,818.68 NPV= PVCI - PVCO 15,818.68 Net present value is $15818.68 Calculation of internal rtae of return: Statement showing NPV Particulars Time PVf 20% Amount PV Cash Outflows - 1.00 -2,80,000.00 -2,80,000.00 PV of Cash outflows = PVCO -2,80,000.00 Cash inflows 1.00 0.8333 74,000.00 61,666.67 Cash inflows 2.00 0.6944 74,000.00 51,388.89 Cash inflows 3.00 0.5787 74,000.00 42,824.07 Cash inflows 4.00 0.4823 74,000.00 35,686.73 Cash inflows 5.00 0.4019 74,000.00 29,738.94 Cash inflows 6.00 0.3349 74,000.00 24,782.45 PV of Cash Inflows =PVCI 2,46,087.75 NPV= PVCI - PVCO -33,912.25 IRR= Lower rate+ (Lower rate NPV) *(Higher rate- lower rate) (lowe rate NPV- Higher rate NPV) 13%+ 15818.68 *(20%-13%) (15818.68+33912.25) 13%+ 2.27% 15.270% Internal rate of return is 15.27%
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