A potential investment has a cost of $395,000 and a useful life of 6 years. Annual cash sales from the investment are expected to be $267,382 and annual cash operating expenses are expected to be $105,332. The expected salvage value at the end of the investment's life is $50,000. The company has a before-tax discount rate of 17%. Required: Calculate the following. (Round dollar amounts to the nearest whole dollar and IRR to one decimal place (i.e. .055 = 5.5%). Enter negative amounts with a minus sign.) Annual PMT of the investment FV of the investment NPV of the investment IRR of the investment $ $ %

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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**Investment Analysis: Educational Exercise**

**Scenario:**

A potential investment has a cost of $395,000 and a useful life of 6 years. Annual cash sales from the investment are expected to be $267,382 and annual cash operating expenses are expected to be $105,332. The expected salvage value at the end of the investment’s life is $50,000. The company has a before-tax discount rate of 17%.

**Required Calculations:**

Calculate the following (round dollar amounts to the nearest whole dollar and IRR to one decimal place, i.e., .055 = 5.5%. Enter negative amounts with a minus sign):

1. **Annual Payment (PMT) of the investment:**
   - Represented in dollars ($)
   
2. **Future Value (FV) of the investment:**
   - Represented in dollars ($)
   
3. **Net Present Value (NPV) of the investment:**
   - Represented in dollars ($)
   
4. **Internal Rate of Return (IRR) of the investment:**
   - Represented in percentage (%)

**Formulas and Concepts:**

**Annual PMT:** This is the annual cash inflow net of expenses.  
**FV:** The future value of the cash inflows and the salvage value.  
**NPV:** Net Present Value, which takes into account all cash flows (both inflows and outflows) discounted back to present values.  
**IRR:** Internal Rate of Return, which is the discount rate that makes the NPV of the investment zero.

Use these definitions to compute each required figure, ensuring to use the appropriate financial formulas and discount rates as specified.
Transcribed Image Text:**Investment Analysis: Educational Exercise** **Scenario:** A potential investment has a cost of $395,000 and a useful life of 6 years. Annual cash sales from the investment are expected to be $267,382 and annual cash operating expenses are expected to be $105,332. The expected salvage value at the end of the investment’s life is $50,000. The company has a before-tax discount rate of 17%. **Required Calculations:** Calculate the following (round dollar amounts to the nearest whole dollar and IRR to one decimal place, i.e., .055 = 5.5%. Enter negative amounts with a minus sign): 1. **Annual Payment (PMT) of the investment:** - Represented in dollars ($) 2. **Future Value (FV) of the investment:** - Represented in dollars ($) 3. **Net Present Value (NPV) of the investment:** - Represented in dollars ($) 4. **Internal Rate of Return (IRR) of the investment:** - Represented in percentage (%) **Formulas and Concepts:** **Annual PMT:** This is the annual cash inflow net of expenses. **FV:** The future value of the cash inflows and the salvage value. **NPV:** Net Present Value, which takes into account all cash flows (both inflows and outflows) discounted back to present values. **IRR:** Internal Rate of Return, which is the discount rate that makes the NPV of the investment zero. Use these definitions to compute each required figure, ensuring to use the appropriate financial formulas and discount rates as specified.
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