
Concept explainers
(a)
Introduction:
To calculate:
The net present value.

Answer to Problem 3E
Net present value is $730,578.13.
Explanation of Solution
Initial investment = $1,600,000
Annual net cash flow = net income +
= $250,000 + $156,250
= $406,250
Present value of
Net present value = Present value of inflow of cash − Present value of outflow of cash
= $2,330,578.13 - $1,600,000
= $730,578.13
(b)
Introduction:
To state:
If the rate of IRR is more or less than 10%.

Explanation of Solution
Net present value is $730,578.13.
Since the Net present value is positive, IRR should be greater than the cost of capital of 10%.
(c)
Introduction:
Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.
To calculate:
The net present value using 20% discount rate.

Answer to Problem 3E
Net present value is $40,272.5.
Explanation of Solution
Initial investment = $1,600,000
Annual net cash flow = net income + depreciation
= $250,000 + $156,250
= $406,250
Present value of cash flows:
Net present value = Present value of inflow of cash − Present value of outflow of cash
= $1,640,272.5 - $1,600,000
= $40,272.5
(d)
Introduction:
Internal
To estimate:
The IRR of the project.

Answer to Problem 3E
IRR is 19.13%.
Explanation of Solution
Year | Annual cash flow |
0 | ($1,600,000) |
1 | $406,250 |
2 | $406,250 |
3 | $406,250 |
4 | $406,250 |
5 | $406,250 |
6 | $406,250 |
7 | $406,250 |
8 | $406,250 |
IRR | 19.13% |
Formula used (in excel) = IRR [All the values of annual cash flow]
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Chapter 11 Solutions
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