kansas furniture corporation is evaluating a capital budgeti

kansas furniture corporation is evaluating a capital budgeting project that cost $34,000 and is expected to generate after tax cash flows equal to $14,150 per year for three years. the required rate of return is 12 percent. compute the the projects (a) net present value (b) internal rate of return. (c) should the project be purchased?

Solution

Hi,

Please find the detailed answer as follows:

Part A:

NPV = -34000 + 14150/(1+.12)^1 + 14150/(1+.12)^2 + 14150/(1+.12)^3 = -14.09

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Part B:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -34000 + 14150/(1+r)^1 + 14150/(1+r)^2 + 14150/(1+r)^3

Solving for r, we get IRR as 11.98%

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Part C:

No, the project should not be accepted as it results in a Negative NPV and a lower IRR than the cost of capital of 12%.

Thanks.