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Quiz.Chapter.9.Solutions.April 2006

# Quiz.Chapter.9.Solutions.April 2006 - Accounting 202 Spring...

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Accounting 202 Quiz 9 Spring 2006 Chapter 9 April 13, 2006 ANSWERS Last Name:______________________ First Name: ____________________ 1. A project will require an initial investment of \$750,000 and will return \$200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? Based on this analysis, should the company proceed with the project? Answer (\$200,000 * 3.8897) - \$750,000 = \$27,940 Yes, since the net present value is greater than zero, the company should proceed with the project. 2. A project will require an initial investment of \$600,000 and is expected to generate the following cash flows: Year 1 \$100,000 Year 2 \$250,000 Year 3 \$250,000 Year 4 \$200,000 Year 5 \$100,000 a) What is the project’s payback period? Answer \$100,000 + \$250,000 + \$250,000 = \$600,000, so the payback period is three years. b) If the required rate of return is 20% and taxes are ignored, what is the project’s net present value? Answer: (\$600,000) * 1.000 = (\$600,000) \$100,000 * 0.8333 = 83,330 \$250,000 * 0.6944 = 173,600 \$250,000 * 0.5787 = 144,675 \$200,000 * 0.4823 = 96,460 \$100,000 * 0.4019 = 40,190 Net present value (\$61,745)

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3. An investment of \$185,575 is expected to generate returns of \$65,000 per year for each of the next four years. What is the investment’s internal rate of return?
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