Management of a firm with a cost of capital of 12 percent is considering a $100,000 investment with annual ash flow of $44,524 for three years.
a. What are the investment net present value and internal rate of return?
b. The internal rate of return assumes that each cash flow is reinvested at the internal rate of return. If that reinvestment rate is achieved, what is the total value of the flows at the end of the third year?
c. The Net present value assumes that each cash flow is reinvested at the firm’s cost of capital. What would be the total value of cash flows at the end of the third year, if the funds are
reinvested at the firm’s cost of capital?
TUTORIAL PREVIEW
NPV = -100,000 + 44,524 x PVIFA 12%, 3 years
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