Question

! Required information [The following information applies to the questions displayed below.] Park Co. is considering an investment that requires immediate payment of $27,000 and provides expected cash inflows of $9,000 annually for four years. Assume Park Co. requires a 10% return on its investments. 1-a. What is the net present value of this investment? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.) 1-b. Based on NPV alone, should Park Co. invest? Complete this question by entering your answers in the tabs below. Required 1A Required 1B What is the net present value of this investment? Cash Flow Select Chart Amount х PV Factor Present Value Annual cash flow $ 0 Net present value < Required 1A Required 1B >

Answer 1

Answer :

1A. NPV :

NPV = Present value of annual cash inflow - Initial Investment

Cash Flow	Amount	x	PV Factor	=	Present value
Annual cash flow	$9,000	x	3.1699	=	$28,529
Less : Amount Invested					$27,000
Net Present value					$1,529

1B. Yes, Park Co. should invest.

2A. IRR :

IRR = R1 + [NPV1 x (R2 - R1)] /  (NPV1 - NPV2)

Where:

R1      =   Lower discount rate i.e. 10%

R2      =   Higher discount rate i.e. 12%

NPV1   =   Higher Net Present Value (derived from R1) i.e $1,529

NPV2   =   Lower Net Present Value (derived from R2)

= [$9,000 x PVAF(12%,4years)] - $27,000

= [$9,000 x 3.0373] - $27,000 = $336

IRR = 10% + [$1,529 x 2] / ($1,529 - $336)

IRR = 10% + 2.56

IRR = 12.56%

2B. Yes, Park Co. should make the investment.