Mikkelson Corp makes an investment of $14,400 that provides the following cash f
ID: 2634517 • Letter: M
Question
Mikkelson Corp makes an investment of $14,400 that provides the following cash flow:
Year
Cash Flow
1................
$ 7,000
2................
7,000
3................
4,000
a. What is the net present value at an 11 percent discount rate?
b. What is the internal rate of return? Use the interpolation procedure.
c. In this problem would you make the same decision under both parts a and b?
Year
Cash Flow
1................
$ 7,000
2................
7,000
3................
4,000
Explanation / Answer
a.
Discount rate
11%
Year
Cash flows
PV@11%
NPV
0
-14,400
-14400
512.4288642
1
7,000
6306.306306
2
7,000
5681.357033
3
4,000
2924.765525
b. Discount rate of 13.218% makes NPV as 0. So Internal rate of return = 13.218%
Discount rate(Hit an Trial)
13.218%
Year
Cash flows
PV@11%
NPV
0
-14,400
-14400
-0.083658068
1
7,000
6182.762458
2
7,000
5460.935945
3
4,000
2756.217939
c. As per a NPV is positive so project is acceptable. As per B internal rate of return (13.218%) is more than required rate(11%) so project is acceptable. Hence we will make the same decision under both part a and b
Discount rate
11%
Year
Cash flows
PV@11%
NPV
0
-14,400
-14400
512.4288642
1
7,000
6306.306306
2
7,000
5681.357033
3
4,000
2924.765525