Question
ABC Company is considering an investment of $15,000, which produces the following inflows: Year 1 = $8000, Year 2 = $7000, Year 3 = $4000,
ABC Company is considering an investment of $15,000, which produces the following inflows: Year 1 = $8000, Year 2 = $7000, Year 3 = $4000, Year 4 = $2000 You are going to use the net present value profile to approximate the value for the internal rate of return. Please follow these steps: 1. Calculate payback period for the project. 2. Determine the net present value of the project based on a 5% discount rate. 3. Determine the net present value of the project based on a 10 percent discount rate. 4. Determine the net present value of the project based on a 20 percent discount rate. 5. Draw a net present value profile for the investment. Observe the discount rate at which the net present value is zero. This approximates the internal rate of return on the project. 6. Compute the internal rate of return. Compare your answers in parts 5 and 6. 7. How would NPV change if initial investment increases to $20,000 with 10 percent discount rate? Calculate and explain why this change has happened? Which method of capital budgeting would you have more confidence in and why?
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