Question

Net Present Value Method and Internal Rate of Return Method for a service company Keystone Healthcare Corp. is proposing to spend $176,055 on an eight-year project that has estimated net cash flows of $33,000 for each of the eight years. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 000 vo u Aw N 4.917 4.355 4.111 3.784 3.326 4.868 4.564 4.160 3.605 5.582 6.210 5.335 4.968 4.487 3.837 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Compute the net present value, using a rate of return of 12%. Use the table of present value of an annuity of $1 presented above. If required, round to the nearest dollar. Use the minus sign to indicate a negative net present value. esent value of an annuity of $1 presented above. If required,

Answer 1

Requirement a: Compute net present value as follows

Particulars	Amount
Present value of annual net cash flows ($33,000 × 4.968)	$163,944
Deduct: Amount to be invested	$176,055
Net present value	($12,111)

Note: The present value factor is 4.968 when the required rate of return is 12% and time period is 8 years.

Requirement b: The rate of return from the project is less than 12% because the net present value of the project is −$12,111 when the required rate of return is 12%.

Requirement c: The internal rate of return is 10%. and it is determined as follows

Present value factor = 5.335 ($176,055 ÷ $33,000)

The interest rate is 10% when the present value factor is 5.335 and time period is 8 years.

Present Value of an Annuity of $1 at Compound Interest Year 6 % 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.170 3.037 2.855 2.589 3.465 4.212 3. 791 3.605 3.352 2.991 4.917 4.355 4.111 5.582 4.868 4.564 8 6.210 5.335 4.968 3.784 3.326 4.160 3.605 4.487 3.837 4.772 4.031 5.0194.192 9 6.802 5.759 5.328 107.360 6.145 5.650