Question

Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and cash flow from the project are as follows.
year net income Net cash flow

1 90,000 210,000

2 80,000 200,000

3 40,000 160,000

4 30,000 150,000

240,000 720,000


Company's minimum desired rate of return for net present value analysis is 15 %. The present value of the $1 at compound intrest of 15% for 1,2,3,4 years is .870 .756 .658 and .572 determine the average rate of return on investment using straight line method and net present value.

Answer 1

Answer:

value.(a)$240,000/4= $60,000= 25%($480,000 + $0)/2 $240,000

(b)YearPresent Valueof $1 at 15%NetCash FlowPresent Value ofNet Cash Flow1.870$ 210,000$ 182,7002.756200,000151,2003.658160,000105,2804 .572 150,000 85,800 Total $ 720,000 $ 524,980 Amount to be invested 480,000 Net present value $ 44.4980

Answer 2

Answer:

Average rate of Return = Average profit / Average investment

                                       = 60,000 / 240,000

                                       =0.25 *100 = 25%

Net Present value = Present value of future cash floes - initial investment

                             = $524,980 - $480,000

                            = $44,980

Explanation:

profits = 240,000/4 =60,000

average investment = 480,000/2=240,000

Present value = $524,980

year 1 = 210,000*0.870 =182,700

year 2 = 200,000*0.756=151,200

year 3 = 160,000*0.658=105,280

year 4 = 150,000*0.572 =85,800