Question

Assume that an industrial building can be purchased for $1,700,000 today, is expected to yield cash...

Assume that an industrial building can be purchased for $1,700,000 today, is expected to yield cash flows of $125,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction.

A) 3.14%

B) 6.58

C) 9.20%

D) 10.37%

19) For Question #18, assume you don’t know what the purchase price is. What price would you want to pay in order to obtain a return of 8%

A) Can’t determine from these facts

B) $1,712,000

C) $1,855,678

D) $1,605,036

Homework Answers

Answer #1

a.Let irr be x%
At irr,present value of inflows=present value of outflows.

1,700,000=125,000/1.0x+125,000/1.0x^2+125,000/1.0x^3+125,000/1.0x^4+125,000/1.0x^5+1,625,000/1.0x^5

Hence x=irr=6.58%(Approx).

b.We need to calculate the present value of inflows at the rate of 8%;ie:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=125,000/1.08+125,000/1.08^2+125,000/1.08^3+125,000/1.08^4+125,000/1.08^5+1,625,000/1.08^5

=$1605036(Approx)

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Question 8: uppose a certain property is expected to produce net operating cash flows annually as...
Question 8: uppose a certain property is expected to produce net operating cash flows annually as follows, at the end of each of the next five years: $35,000, $37,000, $45,000, $46,000, and $40,000.  In addition, at the end of the fifth year we will assume the property will be (or could be) sold for $400,000, what is the highest price you would be willing to pay for this property? (ie. at what price does the net present value equal zero? ie....
An investment requires an outlay of $100,000 today. Cash inflow from the investment are expected to...
An investment requires an outlay of $100,000 today. Cash inflow from the investment are expected to be $40,000 per year at the end of year 4, 5, 6, 7, and 8. You require a 20% rate of return on this type of investment. Answer the following questions and explain the formula for each question: First draw the time line and specify the cash outflow and inflow for each period. Calculate the net present value. Calculate the Internal rate of return...
a. What is the Present Value using a discount rate of 8% given the following cash...
a. What is the Present Value using a discount rate of 8% given the following cash flows?             Year 1:            40,000             Year 2:            42,000             Year 3:            44,000             Year 4:            45,000             Year 5:            37,000             And, a sale occurs at the end of year 5 at a price of $425,000.             A) $517,238             B) $455,480             C) can’t determine from the facts given             D) $122,344 b. Same facts as part a. Would you pay the...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to new product development projects. b. Sensitivity analysis only applies to new product development projects c. Sensitivity analysis involves changing one project variable at a time while scenario analysis involves changing more than one project variable at the same time d. Sensitivity analysis only applies when projects are mutually exclusive. 3. Which of the following statements is true regarding the internal rate of return (IRR)?...
Apple is considering whether to build the “Global Store” in Federation Square Melbourne today in 2019....
Apple is considering whether to build the “Global Store” in Federation Square Melbourne today in 2019. Apple has already purchased the land on the site and wants to make a decision about whether to build on it. Assume the store will have a life of 20 years and will generate revenues of $32 million per year AUD over the 20 years (with the first cash flow at the end of year 1). By building the store Apple will attract negative...
The value of a share of common stock depends on the cash flows it is expected...
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is -Select-less thanequal togreater...
SHOW CALCULATION AND EXPLANATION, PLEASE! 1- For a given amount, the lower the discount rate, the...
SHOW CALCULATION AND EXPLANATION, PLEASE! 1- For a given amount, the lower the discount rate, the less the present value. A) True B) False 2- What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the cost of capital is 14%? A) $3,397.57 B) $4,473.44 C) $16,100.00 D) $35,000.00 3- The decision rule for net present value is to: A) Accept all projects with cash inflows exceeding initial cost. B) Reject all...
Question: What is the amount of cash received from the sale of equipment if Horizon Insurance...
Question: What is the amount of cash received from the sale of equipment if Horizon Insurance elects to outsource publishing to G-Art? Use the following case to help determine the answer: Horizon Insurance (HI) was a full-service regional insurance agency that has done all the printing and publishing of its own promotional brochures, newsletters, informational pamphlets, and required regulatory reports. Linda Wolfe, the business manager of the agency, had for some time thought that the firm might save money and...
Coolplay Corp. is thinking about opening a soccer camp in southern California. To start the camp,...
Coolplay Corp. is thinking about opening a soccer camp in southern California. To start the camp, Coolplay would need to purchase land and build four soccer fields and a sleeping and dining facility to house 150 soccer players. Each year, the camp would be run for 8 sessions of 1 week each. The company would hire college soccer players as coaches. The camp attendees would be male and female soccer players ages 12–18. Property values in southern California have enjoyed...
Instructions: The assignment is based on the mini case below. The instructions relating to the assignment...
Instructions: The assignment is based on the mini case below. The instructions relating to the assignment are at the end of the case. The Case Mike Chang and Joan Brown are facing an important decision. After having discussed different financial scenarios into the wee hours of the morning, the two computer engineers felt it was time to finalize their cash flow projections and move to the next stage – decide which of two possible projects they should undertake. Both had...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT
Active Questions
  • Southwestern Edison Company leased equipment from Hi-Tech Leasing on January 1, 2018. Hi-Tech manufactured the equipment...
    asked 10 seconds ago
  • Calculate the duration of a 2-year bond with 8% semiannual coupon selling at par if interest...
    asked 31 seconds ago
  • Corporate governance is an essential condition to the establishment of a stock market, attracting major investment...
    asked 1 minute ago
  • Gadget Lubricants expects the following sales in units in the last quarter (Oct-Dec) of 2019: Oct...
    asked 1 minute ago
  • A loan of 50,000 euros is to be repaid in equal quarterly installments in five years....
    asked 3 minutes ago
  • The symptoms of tetanus are due to ____ . Deep puncture wounds. Hemolysis Lack of oxygen...
    asked 5 minutes ago
  • On March 1, year 1, Marvin Corporation promises to unconditionally transfer a building that cost $125,000...
    asked 5 minutes ago
  • Oak Products produces two joint products (A and B). Prior to the split-off point, the company...
    asked 5 minutes ago
  • Be sure to answer all parts. Write a balanced equation for each reaction. a. HNO3(aq) +...
    asked 5 minutes ago
  • According to the phagotrophic (predatory) hypothesis of Thomas Cavalier-Smith, the correct sequence for the origin of...
    asked 5 minutes ago
  • answer your question in 150 words. Describe the relationship between bond prices and inflation. Would you...
    asked 9 minutes ago
  • John Smith is a minority shareholder in a family owned corporation that is organized under the...
    asked 12 minutes ago