Question

"Windsor Corporation is considering investing in a new facility. The estimated cost of the facility is $3,280,000. It will be used for 12 years, then sold for $630,000. The facility will generate annual cash flows of $X for the next 12 years. If the discount rate is Y%, calculate:

A) The annual cash flows (X).
B) The net present value (NPV) of this investment.
C) The internal rate of return (IRR) for this investment.

Answer 1

To calculate the annual cash flows, subtract the initial investment and resale value from the present value of the cash flows. To calculate the net present value, subtract the initial investment from the present value of the cash flows. To calculate the internal rate of return, find the discount rate at which the present value of the cash flows is equal to the initial investment.

Step-by-step explanation:

Calculating the annual cash flows (X):

The annual cash flows (X) can be calculated by subtracting the cost of the facility and the resale value from the present value of the cash flows over 12 years:

X = Present Value of Cash Flows - Cost of Facility + Resale Value

Calculating the net present value (NPV):

The net present value (NPV) can be calculated by subtracting the initial investment from the present value of the cash flows:

NPV = Present Value of Cash Flows - Initial Investment

Calculating the internal rate of return (IRR):

The internal rate of return (IRR) can be calculated by finding the discount rate at which the present value of the cash flows is equal to the initial investment:

IRR = Discount Rate at which Present Value of Cash Flows = Initial Investment