2. A company is considering an investment of $600,000 in a new product line. The investment...

2. A company is considering an investment of $600,000 in a new product line. The investment will be made only if it will result in a rate of return of 20% per year or higher. If the net cash flow is expected to be between $150,000 and $250,000 per year for 6 years. Use present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue. Show how you arrived at your decision. Please solve without using Table or excel

Expert Solution

Let us assume the annual revenue for which the project if beneficial is $ A.

The required rate of return is 20%.

If the firm earns a return of $ 180,424 (Approximatly) then the rate of return is 20%. This I have calculated using equation. Now, we can do this using excel I have compared it using IRR. Refer the attached table.(Just for reference)

As we can see from the above table that when the revenue is greater than 180,423.45 the rate of return is greater than 20%. Thus, it is sensitive in the given range.

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.

Rahul Sunny answered 2 years ago

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