Question

a: should/should not

b: should/should not

c: the same/different

An investment costs $17,944 and will generate cash flow of $4,000 annually for six 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, any. Round your answer to the nearest dollar, Based on the net present value, should the firm make the investment? The investment Set B made. c. Do the net present value and the internal rate of return suggest the same courses of action? The net present value and the internal rate of return suggest - B courses of action

Answer 1

a) The internal rate of return is the rate at which investment cost is equal to present value of cash inflows.

Investment cost = Annual cash inflows*PVAF(i%, 6 yrs) (where i = internal rate of return)

$17,944 = $4,000*PVAF(i%, 6 yrs)

PVAF(i%, 6 yrs) = 17,944/4,000 = 4.486

Now, in the given present value table the value of 4.486 for 6 years is at 9%. (See the table).

Therefore the internal rate of return is 9%.

As the internal rate of return is less than cost of capital , the investment should not be made.

b) Present value of cash inflows = Annual cash inflows*PVAF(10%, 6 yrs)

= $4,000*4.355 = $17,420

Net Present Value = PV of Cash Inflows - Investment cost

= $17,420 - $17,944 = -$524

As the net present value of the investment is negative, the investment should not be made.

c) The net present value and the internal rate of return suggest the same courses of action.