Question

a: should/should not

b: should/shouod not

An investment costs $23,958 and will generate cash flow of $6,000 annually for five years. The firm's cost of capital is 10 percent. Use Appendix D to answer the questions a. What is the investment's Internal rate of return? Round your answer to the nearest whole number Based on the internal rate of return, should the firm make the investment? The investment Select B made b. What is the investment's net present value? Use a minus sign to enter a negative value, if any, Round your answer to the nearest dollar. Based on the net present value, should the firm make the investment? The investment Select made.

appendix d

Answer 1

The answer has been presented in the supporting sheet. All the parts has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

1 Answer 2 Parta) 3 Internal Rate of Return 4 Presen value = annual payment * Present value annuity(r%,5) 5 23958 = 6000* Present value annuity 6 23958/6000 = present value annuity (r%,5) 7 3.993 = Present value annuity (r%,5) 9 From present value annuity table it is concluded that this annuity is for 8% and for 5 years TU 11 Thus the correct answer is 8% 13 The investment should not made. 14 15 Explanation 16 As IRR rate of return is less than firms cost of caital, therefore investment should not be made 17 18 Part b) 19 Net Present value = Present value of cash inflows - present value of cash outflows 20 = (6000*present value annuity (10%,5)) - 23958 21 = (3.791*6000) - 23958 22 = - $1212 23 24 The correct answer is - $1212 26 The investment should not made 28 Explanation 29 Since the NPV is negative, so the investment should not be made.