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M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3, 11-4] Vaughn Company has...

M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3, 11-4]

Vaughn Company has the following information about a potential capital investment:

Initial investment $ 280,000
Annual cash inflow $ 74,000
Expected life 6 years
Cost of capital 13%


1. Calculate the net present value of this project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round the final answer to nearest whole dollar.)

    

Solutions

Expert Solution

Calculation of Net present value:
Statement showing NPV
Particulars Time PVf 13% Amount PV
Cash Outflows                     -                                                                1.00 -2,80,000.00 -2,80,000.00
PV of Cash outflows = PVCO -2,80,000.00
Cash inflows                1.00                                                          0.8850        74,000.00        65,486.73
Cash inflows                2.00                                                          0.7831        74,000.00        57,952.85
Cash inflows                3.00                                                          0.6931        74,000.00        51,285.71
Cash inflows                4.00                                                          0.6133        74,000.00        45,385.59
Cash inflows                5.00                                                          0.5428        74,000.00        40,164.24
Cash inflows                6.00                                                          0.4803        74,000.00        35,543.57
PV of Cash Inflows =PVCI    2,95,818.68
NPV= PVCI - PVCO        15,818.68
Net present value is $15818.68
Calculation of internal rtae of return:
Statement showing NPV
Particulars Time PVf 20% Amount PV
Cash Outflows                     -                                                                1.00 -2,80,000.00 -2,80,000.00
PV of Cash outflows = PVCO -2,80,000.00
Cash inflows                1.00                                                          0.8333        74,000.00        61,666.67
Cash inflows                2.00                                                          0.6944        74,000.00        51,388.89
Cash inflows                3.00                                                          0.5787        74,000.00        42,824.07
Cash inflows                4.00                                                          0.4823        74,000.00        35,686.73
Cash inflows                5.00                                                          0.4019        74,000.00        29,738.94
Cash inflows                6.00                                                          0.3349        74,000.00        24,782.45
PV of Cash Inflows =PVCI    2,46,087.75
NPV= PVCI - PVCO      -33,912.25
IRR= Lower rate+ (Lower rate NPV) *(Higher rate- lower rate)
(lowe rate NPV- Higher rate NPV)
13%+ 15818.68 *(20%-13%)
(15818.68+33912.25)
13%+ 2.27%
15.270%
Internal rate of return is 15.27%

ekkarill92 answered 1 year ago
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