You are making a $100,000 investment and feel that a 10 percent rate of return i
ID: 2789075 • Letter: Y
Question
You are making a $100,000 investment and feel that a 10 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $50,000 in the first year, $55,000 in the second year, and $60,000 in the third year. You expect to pay out $65,000 as an additional investment in the fourth year. Can you accept this project? What is the main reason why?
No, the cash flows are unconventional
No, the IRR is less than the required rate
No, the NPV is -$8,407.90
Yes, the IRR is greater than the required rate
Yes, the NPV is $80,383.85
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=50000/1.1+55000/1.1^2+60000/1.1^3
=$135987.979
Present value of outflows=cash outflow*Present value of discounting factor(rate%,time period)
=100,000+65000/1.1^4
=$144395.8746
NPV=Present value of inflows-Present value of outflows
=$135987.979-$144395.8746
=(8407.90)
Hence since NPV is negative;project should not be accepted.
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