Answer:
a) -$1,053,400
b) 8% rounded
Explanation:
A)
We first calculate free cash flows
Free cash flow each year = Net operating income + Depreciation
Free cash flow each year = 300,000 + 600,000 = $900,000
Annuity value for 16% discount factor for 5 years = 3.274 (viewed from a table)
Present value of cash flows = 900,000 * 3.274 = $2,946,600
NPV = 2946600 - 4000000 = -$1,053,400
B)
Simple rate of return = Operating Income / Initial outlay
ROR = 300,000 / 4,000,000 = 0.075 or 7.75% or 8% rounded
Hope that helps.