Question
In: Accounting
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% | ||||
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