Park Co. is considering an investment that requires immediate payment of $31,000

Question

Park Co. is considering an investment that requires immediate payment of $31,000 and provides expected cash inflows of $8,654 annually for five years. Assume Park Co. requires a 10% return on its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) 1-a. What is the internal rate of return? (Round your present value factor to 4 decimals and your internal rate of return to 2 decimals.) 1-b.Based on its internal rate of return, should Park Co. make the investment? Yes No

Explanation / Answer

Solution - 1a:

Initial Investment = $31,000

Annual Cash flows for 5 years = $8654

Present value factor for annual cash flows = 31000/8654 = 3.582

On review of PV Table present value of cash flow for $1 is 3.582 comes at IRR of 12.25%

Solution – 1b:

As required rate of return in 10% and Park Co gets IRR of 12.25% therefore Park Co should go for this investment.

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