Turner Video will invest $94,500 in a project. The firm’s cost of capital is 10 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 | $ | 33,000 | |
| 2 | 35,000 | ||
| 3 | 32,000 | ||
| 4 | 38,000 | ||
| 5 | 45,000 | ||
The internal rate of return is 15 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.)
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.)
c. Which investment assumption is
better?
Reinvestment assumption of IRR
Reinvestment assumption of NPV
| a) | |||
| Year | Inflows | FV factor at 10% | Future Values |
| 1 | $ 33,000 | 1.464 ( 1.331 x 1.1 ) |
$ 48,312 |
| 2 | $ 35,000 | 1.331 ( 1.21 x 1.1) |
$ 46,585 |
| 3 | $ 32,000 | 1.21 ( 1.1 x 1.1) |
$ 38,720 |
| 4 | $ 38,000 | 1.1 | $ 41,800 |
| 5 | $ 45,000 | 1.0 | $ 45,000 |
| $ 220,417 | |||
| b) | |||
| Year | Inflows | FV factor at 15% | Future Values |
| 1 | $ 33,000 | 1.749 (1.521 x 1.15) |
$ 57,717 |
| 2 | $ 35,000 | 1.521 (1.323 x 1.15) |
$ 53,235 |
| 3 | $ 32,000 | 1.323 ( 1.15 x 1.15) |
$ 42,336 |
| 4 | $ 38,000 | 1.15 | $ 43,700 |
| 5 | $ 45,000 | 1.0 | $ 45,000 |
| $ 241,988 | |||
| C) | Reinvestment assumption of NPV is better |
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