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Exercise 8-9 (30 minutes)
1.
Item
Year(s)
Amount of
Cash Flows
15%
Factor
Present Value
of Cash Flows
Initial investment .....
Now
$(40,350)
1.000
$(40,350)
Annual cash inflows ..
1-4
$15,000
2.855
42,825
Net present value .....
$ 2,475
Yes, this is an acceptable investment. Its net present value is positive,
which indicates that its rate of return exceeds the minimum 15% rate of
return required by the company.
2.
Investment required
Factor of the internal =
rate of return Net annual cash inflow
$111,500
= = 5.575
$20,000
Looking in Exhibit 8B-2, and reading along the 15-year line, we find that
a factor of 5.575 represents an internal rate of return of 16%.
3.
Investment required
Factor of the internal =
rate of return Net annual cash inflow
$14,125
= = 5.650
$2,500
Looking in Exhibit 8B-2, and reading along the 10-year line, a factor of
