the end of the three years. If the cost of capital is 10 percent, shoid h ment b
ID: 2788200 • Letter: T
Question
the end of the three years. If the cost of capital is 10 percent, shoid h ment be undertaken? Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the third year. From the end of the third year until the end of the 12th year (10 periods), the annual cash flow will be $34,000. If the cost of capital is 12 percent, should this project be undertaken? 16. Intermediate Problems 17. The Hudson Corporation makes an investment of $24,000 that provides the following cash flow: Year Cash Flow ..$13,000 13,000 4,000 a. What is the net present value at an 8 percent discount rate? b. What is the internal rate of return'? c. In this problem, would you make the same decision under both parts a and b? 18. The Pan American Bottling Co. is considering the purchase of a new he sneed of hottling and save money The neExplanation / Answer
NPV = present value of cash flows - initial cost
Future value = present value * (1+r)^n
r = interest rate per period
n = number of periods
=>
a)
NPV = -24000 + 13000/(1+8%) + 13000/(1+8%)^2 + 4000/(1+8%)^3
= 2357.77
b)
IRR is the rate at which NPV is zero
=>
-24000 + 13000/(1+IRR%) + 13000/(1+IRR%)^2 + 4000/(1+IRR%)^3 =0
=>
IRR = 14.31%
c)
NPV is positive and IRR is greater than discount rate , hence in both cases one would accept the project
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