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Chapter 26: Q4TI (page 1457)

Cornell Company is considering a project with an initial investment of \(596,500 that is expected to produce cash inflows of \)125,000 for nine years. Cornell鈥檚 required rate of return is 12%.

14. What is the NPV of the project?

15. What is the IRR of the project?

16. Is this an acceptable project for Cornell?

Short Answer

Expert verified

14. The NPV of the company is $69.531.25.

15. The Annuity factor is 4.772, @15% for 9 years. So the IRR of the project is 15%.

16. This project should be accepted by the company.

Step by step solution

01

14. Computing NPV-

Net Cash Inflow

x

Annuity PV Factor

(i = 12%, n = 9)

Present Value

Present value of annuity (a)

$125,000

x

5.32825

$666,031.25

Initial investment (b)

$596,500.00

Net present value (a-b)

$69,531.25

02

15. Computing annuity factor-

Annuityfactor=InvestmentAnnualcashflow=$596,500$125,000=4.772

03

16. Project analysis-

The NPV of the company is greater than zero and the IRR is greater than required rate of return. Thus the company should accept the project.

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Most popular questions from this chapter

How is IRR calculated with unequal net cash inflows?

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