ACCT 505 Solutions to Weekly Problems - Week 7

Exercise 13-9 (30 minutes)

1.

Item

Year(s)

Amount of Cash Flows

15% Factor

Present Value of Cash Flows

Initial investment

Now

(40,350)

(40,350)

Annual cash inflows

1-4

15,000

42,825

Net present value

2,475

Yes, this is an acceptable investment. Its net present value is positive, which indicates that its rate of return exceeds the minimum 15% rate of return required by the company.

2.

Looking in Exhibit 13B-2, and reading along the 15-year line, we find that a factor of represents an internal rate of return of 16%.

3.

Looking in Exhibit 13B-2, and reading along the 10-year line, a factor of represents an internal rate of return of 12%. The company did not make a wise investment...