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Chapter 26: Q4TI (page 1457)

Cornell Company is considering a project with an initial investment of \(596,500 that is expected to produce cash inflows of \)125,000 for nine years. Cornell’s required rate of return is 12%.

14. What is the NPV of the project?

15. What is the IRR of the project?

16. Is this an acceptable project for Cornell?

Short Answer

Expert verified

14. The NPV of the company is $69.531.25.

15. The Annuity factor is 4.772, @15% for 9 years. So the IRR of the project is 15%.

16. This project should be accepted by the company.

Step by step solution

01

14. Computing NPV-

Net Cash Inflow

x

Annuity PV Factor

(i = 12%, n = 9)

Present Value

Present value of annuity (a)

$125,000

x

5.32825

$666,031.25

Initial investment (b)

$596,500.00

Net present value (a-b)

$69,531.25

02

15. Computing annuity factor-

Annuityfactor=InvestmentAnnualcashflow=$596,500$125,000=4.772

03

16. Project analysis-

The NPV of the company is greater than zero and the IRR is greater than required rate of return. Thus the company should accept the project.

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Most popular questions from this chapter

Lockwood Company is considering a capital investment in machinery:

Initial investment $ 600,000

Residual value 50,000

Expected annual net cash inflows 100,000

Expected useful life 8 years

Required rate of return 12%

8. Calculate the payback.

9. Calculate the ARR. Round the percentage to two decimal places.

10. Based on your answers to the above questions, should Lockwood invest in the machinery?

How is payback calculated with equal net cash inflows?

Why are net present value and internal rate of return considered discounted cash flow methods?

Hayes Company is considering two capital investments. Both investments have an initial cost of \(10,000,000 and total net cash inflows of \)17,000,000 over 10 years. Hayes requires a 12% rate of return on this type of investment. Expected net cash inflows are as follows:

Year

Plan Alpha

Plan Beta

1

\( 1,700,000

\) 1,700,000

2

1,700,000

2,300,000

3

1,700,000

2,900,000

4

1,700,000

2,300,000

5

1,700,000

1,700,000

6

1,700,000

1,600,000

7

1,700,000

1,200,000

8

1,700,000

800,000

9

1,700,000

400,000

10

1,700,000

2,100,000

Total

\( 17,000,000

\) 17,000,000

Requirements

  1. Use Excel to compute the NPV and IRR of the two plans. Which plan, if any, should the company pursue?

  2. Explain the relationship between NPV and IRR. Based on this relationship and the company’s required rate of return, are your answers as expected in Requirement 1? Why or why not?

  3. After further negotiating, the company can now invest with an initial cost of $9,500,000 for both plans. Recalculate the NPV and IRR. Which plan, if any, should the company pursue?

Why should both quantitative and qualitative factors be considered in capital investment decisions?
See all solutions

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