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Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent....

Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Inflow
1 $ 12,000
2 14,000
3 18,000
4 22,000
5 26,000


The internal rate of return is 12 percent.


a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

   


b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)
  


c. Which investment assumption is better?
  

Reinvestment assumption of IRR
Reinvestment assumption of NPV

Solutions

Expert Solution

a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years?

ANSWER =

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years?

ANSWER =

c. Which investment assumption is better?

ANSWER = Reinvestment Assumption of NPV

The net present value method is preferable. This is especially true if a project has a high IRR as it may be unrealistic to assume that reinvestments can earn an equally high rate

jeff jeffy answered 2 years ago
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