Refer to Exhibit 10?3. Is the return on this investment proposal exactly 20%, slightly more than 20%,
Question:
Refer to Exhibit 10?3. Is the return on this investment proposal exactly 20%, slightly more than 20%, or slightly less than 20%? Explain your answer.
EXHIBIT 10–3 NPV Analysis of a Proposed Project Initial cost $5,000 Life of the project (years) Annual cost savings $1,800 -0- Salvage value 20% Required rate of return Amount of Cash Present Value of Item Year(s) Flow 20% Factor Cash Flows $ 1,800 1-5 2.991* $5,384 Annual cost savings Initial investment Now (5,000) 1.000 (5,000) $ 384 Net present value *From Exhibit 10-2 above If the Net Present Value Is Then the Project Is Acceptable, since it promises a return greater than the required rate of return Acceptable, since it promises a return equal to the required rate of return Positive Zero Not acceptable, since it promises a return less than the required rate of return Negative
Step by Step Answer:
The return is slightly more than 20 T...View the full answer
Introduction to Managerial Accounting
ISBN: 978-1259105708
5th Canadian edition
Authors: Peter C. Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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