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Oxana [17]
3 years ago
10

Vanessa Company is evaluating two projects. project 1 is a project requiring a capital expenditure of 814,400. the project has a

n estimated life of four years and no salvage value. The estimated net income and net 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
5 240,000 720,000

Companys minimum desired rate or returen 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 0.870 0.756 0.658 and 0.572. Determine the average rate of return on investment using straight line method and net present value.
Business
1 answer:
Olegator [25]3 years ago
6 0

Answer:

The average rate of return on investment using:

 + Straight line method: 23.58%

 + Net present value: 17.85%

Explanation:

* The average rate of return on investment using straight line method:

We have Average rate of return = Average net profit/ Average investment

with average net profit = (90,000 + 80,000 + 40,000 + 30,000 + 240,000)/5 = $96,000

       average investment: (investment at the beginning + investment of the end) /2 = 814,400/2 = 407,200

=> Average rate of return = 96,000 / 407,200 = 23.58%

* The average rate of return on investment using net present value:

The average rate of return is the internal rate of return on the project which is the rate that brings the net present value to zero.

Denote the rate as x => (1+x)^(-t) is the discount rate of year t. Denote 1+x as a, we have:

-814,400 + 210,000/a + 200,000/a^2 + 160,000/a^3 + 150,000/a^4 + 720,000/a^5 = 0 <=> a = 1.1785

=> x = 17.85%

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