Question

Required information 1 of 2 Use the following information for the Quick Study below. The following information applies to the questions displayed below Park Co. is considering an investment that requires immediate payment of $30,485 and provides expected cash inflows of $9,000 annually for four years. Park Co. requires a 6 % return on its investments. QS 11-2 Net present value LO P3 Book 1-a. What is the net present value of this investment? (PV of $1, EV of $1. PVA.of $1, and EVA of $1) (Use appropriate factor(s) from the tebles provided. Round your present velue factor to 4 decimals.) Hine Cash Flow Amount x PV Factor $9.000 x Select Chart Present Value Print Annual cash flow Present Value of an Annuity of 1 $ 0 Immediate cash outflows 30 485 Net present value erences 1-b. Based on NPV alone should Park Co. invest? Yes A

Answer 1

Answer 1-a:

Calculation of Net Present Value:

Initial Investment = $30,485
Annual Cash Flow = $9,000
Period = 4 years
Required Return = 6%

Cash Flow Select Chart PV Factor Present Value Amount х Annual cash flow $ Immediate cash outflows Net present value PVA of $1 $31,185.90 3.4651 9,000.00 х $-30,485.00 700.90

Calculation of Internal Rate of Return:

IRR Factor = Initial Investment / Annual Cash Flow
IRR Factor = $30,485 / $9,000
IRR Factor = 3.3872

Using PVA of $1 table value, IRR is 7%

Answer 1-b:

Based on internal rate of return, Park Co. should make the investment.