The following information applies to the questions displayed below Park Co. is c

Question

The following information applies to the questions displayed below Park Co. is considering an investment that requires immediate payment of $20,957 and provides expected cash inflows of $6,900 annually for four years. Park Co. requires a 9% return on its investments. 1-a. What is the internal rate of return? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.) 1-b. Based on its internal rate of return, should Park Co. make the investment? Yes No

Explanation / Answer

Req 1-A: Annual Cash inflows : $ 6,900 Life of project : 4 years Initial Investment = $ 20,957 Annuity Factor for four years @10% rate = 3.17 Annuity factor for Four years @ 15% rate = 2.855 Present Value of Cash inflows at 10% ($ 6900 * Annutiy factor i.e. 3.17) 21873 Less Intial Investment 20,957 Net Present value 916 Present value of cash inflows at 15% ($6900*Annuity factor i.e. 2.855) 19699.5 less: Initial Investment 20,957 Net Present value -1,258 IRR = Lower rate + (NPV at lower rate/Difference in NPV at both rates) * Difference in rates ( 10% + (916/2174) *5%) = 12.11% IRR of Project   = 12.11% Req 1-B: YES, the company should make the investment As the mnimum rate of return is 9% and IRR of project is 12.11%, which is higher than minimum rate. Hence project is acceptable.

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