Turner Video will invest $84,500 in a project. The firm’s cost of capital is 6 percent....

Turner Video will invest $84,500 in a project. The firm’s cost of capital is 6 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	$	28,000
2		30,000
3		34,000
4		38,000
5		42,000

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.)

Total value of inflows: ___________________.

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.)

Total value of inflows: ___________________.

c. Which investment assumption is better?

	Reinvestment assumption of IRR
	Reinvestment assumption of NPV

Expert Solution

1	Cost of capital, 6%
	Year	Inflow	FV of cash inflow
	1	28000	35349.35488	28000*(1.06)^4
	2	30000	35730.48	30000*(1.06)^3
	3	34000	38202.4	34000*(1.06)^2
	4	38000	40280	38000*1.06
	5	42000	42000	42000
			191562.2349
		Round	191562.23


2	IRR, 12%
	Year	Inflow	FV of cash inflow
	1	28000	44058.54208	28000*(1.12)^4
	2	30000	42147.84	30000*(1.12)^3
	3	34000	42649.6	34000*(1.12)^2
	4	38000	42560	38000*1.12
	5	42000	42000	42000
			213415.9821
		Round	213415.98



3	Reinvestment assumption is better in NPV assumption since it is not easy to earn internal rate of return double than cost of capital.























3

I hope this satisfies the answer.

In case of doubt, please comment. Also, it would be great in case you give thumbs up.

ekkarill92 answered 10 months ago

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