Question
Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value.
Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:
Year | Net Income | Net Cash Flow |
1 | $90,000 | $210,000 |
2 | 80,000 | 200,000 |
3 | 40,000 | 160,000 |
4 | 30,000 | 150,000 |
| $240,000 | $720,000 |
The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is .870, .756, .658, and .572, respectively.
Required:
Determine (a) the average rate of return on investment, using straight-line amortization, and (b) the net present value.
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