Question

The Hudson Corporation makes an investment of $70,400 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 $36,000 2 36,000 3 24,000 a. What is the net present value at a discount rate of 13 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?

Answer 1

a. Net Present Value : $ 6,284.89

NPV = 36,000 / ( 1.13) + 36,000 / ( 1.13 ) ² + 24,000 / (1.13) ³ - 70,400 = 36,000 x 0.88496 + 36,000 x 0.78315 + 24,000 x 0.69305 - 70,400 = 60,051.69 + 16,633.20 - 70,400 = $ 6,284.89

b. IRR : 19 %

c. Yes.

In part a, net present value is greater than zero. Therefore, investment project is acceptable.

In part b, the cost of capital of 13 % is lower than its internal rate of return of 19 %. As long as the cost of capital is lower than a project's IRR, the project is acceptable.