M12-15. NPV and IRR: Equal Annual Net Cash Inflows Kailey James Company is evalu
ID: 2560811 • Letter: M
Question
M12-15. NPV and IRR: Equal Annual Net Cash Inflows Kailey James Company is evaluating a capital expenditure proposal that requires an initial investment of $14,900, has predicted cash inflows of $4,000 per year for 12 years, and has no salvage value. Required a. Using a discount rate of 14 percent, determine the net present value of the investment proposal b. Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.) c. What discount rate would produce a net present value of zero?Explanation / Answer
Initial Investment = $14,900
Cash inflows annually = $4,000
Time Period = 12 years
Salvage Value = 0
a. PV of cash flows = 4,000 * PVAF(14% for 12 years) = 4,000 * 5.6603 = 22,641.20
NPV = 22,641.20 - 14,900 = $7,741.20
b. Internal Rate of Return factor = Net investment / Annual cashflows
= 14,900 / 4,000 = 3.725
Look for 3.725 in PV annuity tables for 12 years. It comes out to 25%. So the IRR is 25%
c. For NPV to be zero, present value of cash inflows should be equal to cash outflows. This is possible only at a discount rate equal to IRR. So,discount rate of 25% would produce a Net Present Value of zero.
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