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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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