Question

You have the following information on a potential investment. Capital investment - $70,000 Estima... You have the following information on a potential investment. Capital investment - $70,000 Estimated useful life - 5 years Estimated salvage value - zero Estimated annual net cash inflow - $20000 Required rate of return - 8% What is the net present value of the investment (to the nearest dollar)? a. -56388 b. 20000 c. 9,854 d. 79854 You have the following information on a potential investment. Capital investment - $80,000 Estimated useful life - 5 years Estimated salvage value - 5000 Estimated annual net cash inflow - $6375 What is the annual rate of return on the investment (to the nearest dollar)?

Answer 1

Part I

Net Present Value = $9,860

Part II

Annual rate of Return = 8.5%

Step-by-step explanation:

Part I

Calculating net present value = Present value of cash inflow - Present value of cash outflow.

Present value of cash outflow = $70,000

Present value of cash inflow = Annual cash inflow X Present value factor @ 8 % for 5 years

= $20,000 X 3.993

= $79,860

Net Present Value = $79,860 - $70,000 = $9,860

Part II

Capital outlay = $80,000

Salvage value = $5,000

Annual net cash inflow = $6,375

Annual rate of return =
`(Annual cash inflow)/(Capital outlay - Salvage value) * 100`

=
`(6,375)/(80,000 - 5,000) * 100 = 8.5%`

Final Answer

Part I

Net Present Value = $9,860

Part II

Annual rate of Return = 8.5%