Question

BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year	Net Income	Net Cash Flow
1	$75,000	$285,000
2	102,000	290,000
3	109,500	190,000
4	36,000	125,000
	$322,500	$890,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the following:

a. The average rate of return on investment, including the effect of depreciation on the investment.		%
b. The net present value. Enter negative values as negative numbers.	$

Answer 1

a. The average rate of return on investment, including the effect of depreciation on the investment

Average rate of return on investment

= [Average Net Income / Average Investments] x 100

Average Net Income = $322500 / 4 = $ 80625

Average Investments = ( $806250 + 0 ) / 2 = $ 403125

Average rate of return on investment = [ $80625 / $ 403125 ] x 100 = 20%

Average rate of return on investment = 20%

(b) The net present value = (105,835.00) (Negative)

Year	Net Cash Flow	Present Value Factor	Present Value
1	285,000.00	0.893	254,505.00
2	290,000.00	0.797	231,130.00
3	190,000.00	0.712	135,280.00
4	125,000.00	0.636	79,500.00
Total			700,415.00
Initial Investment			806,250.00
Net present value			(105,835.00)