Question

The Hudson Corporation makes an investment of $28,050 that provides the following cash flow:
Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

Year	Cash Flow
1		$15,000
2		15,000
3		3,000

  
a. What is the net present value at a discount rate of 4 percent? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

c. Would you make the same decision under both parts a and b?
  

	Yes
	No

Answer 1

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

=15000/1.04+15000/1.04^2+3000/1.04^3

=$30958.41

NPV=Present value of inflows-Present value of outflows

=$30958.41-$28050

=$2908.41(Approx).

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

28050 =15000/1.0x+15000/1.0x^2+3000/1.0x^3

Hence x=irr=10.58%(Approx).

c.Hence since NPV is positive and irr is greater than discount rate;both the methods consider accepting the project.

Hence the correct option is 'Yes'.