Homework SourseTurner Video will invest 90500 in a project The firms cost o
Turner Video will invest $90,500 in a project. The firm’s cost of capital is 12 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.
The internal rate of return is 14 percent.
a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years?
| Year | Inflow | ||
| 1 | $ | 31,000 | |
| 2 | 33,000 | ||
| 3 | 37,000 | ||
| 4 | 41,000 | ||
| 5 | 45,000 | ||
Solution
Answer a.
Cost of Capital = 12%
Future Value = $31,000 * 1.12^4 + $33,000 * 1.12^3 + $37,000 * 1.12^2 + $41,000 * 1.12 + $45,000
Future Value = $232,474.52
Value of inflows after five years is $232,474.52
Answer b.
Internal Rate of Return = 14%
Future Value = $31,000 * 1.14^4 + $33,000 * 1.14^3 + $37,000 * 1.14^2 + $41,000 * 1.14 + $45,000
Future Value = $241,073.92
Value of inflows after five years is $241,073.92
