The Hudson Corporation makes an investment of $65,240 that provides the followin

Question

The Hudson Corporation makes an investment of $65,240 that provides the following cash flow Use Appendix B and Appendx D for an approximate answer but calculate your final answer using the $32,000 32,000 20,000 a. What is the net present value at a discount rate of 9 percent? (Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal rate of return c. Would you make the same decision under both parts a and b? res No

Explanation / Answer

Solution:-

a. Net present value:-

b. Internal rate or return:-

The first approximation appears to fall between 14 percent and 15 percent. Since the heavy inflows are in the early years, we will try15 percent.

Since 15 percent is not enough to get $65,240 as the present value, we will try 14 percent.

The correct answer must fall between 14 percent and 15 percent. We interpolate.

14% + 952.57 / 1,019.57 (1%)

= 14% + 0.93% = 14.93%

IRR = 14.93%

c.

Yes. Both the NPV is greater than 0 and the IRR is greater than the cost of capital.

Please Rate or comment if you have any doubt regarding this solution.

Year Cash flow 9% PVIF Present Value 1 32,000 0.9174 29357.80 2 32,000 0.8417 26,933.76 3 20,000 0.7722 15,443.67 Present value of inflows 71,735.23 Present value of outflows 65,240 Net present value 6,495.23

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