Derrick iverson is a divisional manager for holston company. his annual pay raises are largely determined by his division's return on investment (roi), which has been above 20% each of the last three years. derrick is considering a capital budgeting project that would require a $3,300,000 investment in equipment with a useful life of five years and no salvage value. holston company's discount rate is 17%. the project would provide net operating income each year for five years as follows:
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Ответ:
a. Compute the project's net present value.
NPV = -$420,588.45b. Compute the project's internal rate of return.
11.32%Explanation:
we need to calculate the net cash flows = net operating income + depreciation expense = $300,000 + $600,000 = $900,000
now we need to determine the net present value (NPV):
initial investment -$3,300,000CF1 $900,000CF2 $900,000CF3 $900,000CF4 $900,000CF5 $900,000Using an excel spreadsheet and the NPV function with 17% discount rate:
NPV = discounted cash flows - initial investment = $2,879,411.55 - $3,300,000 = -$420,588.45
We can also calculate the internal rate of return using excel and the IRR function:
IRR = 11.32%
Ответ: