ABC Company based in Dallas, Texas wishes to invest $30 million in an apartment
ID: 2474679 • Letter: A
Question
ABC Company based in Dallas, Texas wishes to invest $30 million in an apartment complex in Down Town New Orleans. The Company's normal rate of return on its investments is 6%. Required. Why should the company not accept any investment that yields less than 6 % ? Under what circumstances may a company accept a project that yields less than its normal rate of return? The projected Net Cash inflows of the project are presented below In what year will the investor recover its investment by way of cash payback without discounting? Show computation:Explanation / Answer
ABC Company All Amounts in $ a. The Company should not accept any investment which yields less than 6% since the Net Present Value of such an investment will tend to be negative, given that fact the normal rate of return on investments made by the Company works out to be 6%. b. In case the Company expects high cash inflows over the period of years for which the apartment complex is put to use, the project which yields less than its normal rate of return can be accepted. c. Total Investment by ABC Company = $ 30 million Recovery till Year 4 = $ 28 million Recovery in Year 5 = $ 2 million which will be 2 months Hence, the payback period without discounting will be 4 years 2 months.