Question

While the stay at home order has been in effect, your professor has searched for a project that meets the following characteristics: the project generates yearly net cash inflows of $20,000 for 6 years, has a salvage value of $2,000 at the end of 6 years, has an internal rate of return of 12%, and a required rate of return of 8%. The initial cost of this project that meets all the above characteristics is closest to

Multiple Choice

• $83,234

• $81,742

• $93,720

• $77,638

Answer 1

Answer is $83,234

Initial cost of project=present value of all cash inflows and salvage value.

=20,000×1/(1.12)1 + 20,000×1/(1.12)2    + 20,000×1/(1.12)3  + 20,000×1/(1.12)4 + 20,000×1/(1.12)5  + 20,000×1/(1.12)6  + 2,000×1/(1.12)6

=$ (17,856 + 15,943 + 14,234 + 12,710 + 11,347 + 10,132 + 1013)

= $ 83237 (approx.)

Internal rate of return is a discount rate used to calavulate present value of cash inflows snd salvage value.