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(solution) Using net present value and internal rate of return to


Using net present value and internal rate of return to evaluate investment opportunities Kerry Wood’s rich uncle gave him $60,000 cash as a gift for his 40th birthday. Unlike his spoiled cousins who spend money carelessly, Mr. Wood wants to invest the money for his future retirement. After an extensive search, he is considering one of two investment opportunities. Project 1 would require an immediate cash payment of $52,800; Project 2 needs only a $24,000 cash payment at the beginning. The expected cash inflows are $17,280 per year for Project 1 and $8,400 per year for Project 2. Both projects are expected to provide cash flow benefits for the next four years. Mr. Wood found that the interest rate for a four-year certificate of deposit is about 7 percent. He decided that this is his required rate of return. Required a. Compute the net present value of each project. Which project should Mr. Wood adopt based on the net present value approach? b. Compute the approximate internal rate of return of each project. Which project should Mr. Wood adopt based on the internal rate of return approach? c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances?

 

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Sep 13, 2020

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