Perform various financial calculations. 1) The Hudson Corporation makes an inves
ID: 2719644 • Letter: P
Question
Perform various financial calculations.
1) The Hudson Corporation makes an investment of $24,000 that provides the following cash flow:
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Year Cash
1 ……………………. $13,000
2 ……………………. 13,000
3…………………….. 4,000
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What is the net present value at an 8 percent discount rate?
What is the internal rate of return?
Is this problem, would you make the same decision under both parts A and B?
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2) Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?
Explanation / Answer
(Actual results may vary with answer given to you due to difference in discount factor digits used) The Hudson Corporation Details Year 0 Year 1 Year 2 Year 3 Initial Cost (24,000) Cash Flows 13,000 13000 4000 Discount Factor @8% 1 0.9259 0.8573 0.7938 PV of Cash Flows (24,000.00) 12,037 11,145 3,175 NPV = $ 2,357.77 IRR The Hudson Corporation Details Year 0 Year 1 Year 2 Year 3 Initial Cost (24,000) Cash Flows 13,000 13000 4000 Discount Factor @14.3% 1 0.8749 0.7654 0.6697 PV of Cash Flows (24,000.00) 11,374 9,951 2,679 NPV = $ 2.90 So at required rate of 14.3% , NPV is 0. So IRR is 14.3% Yes as NPV is positive and IRR is more than required rate of return , in both the parameters the investment will have acceptance. Present Value of Receipts of Mrs Crawford. Year Cash flow Discount Factor @14% PV of Cash Flows Year 1 7,600 0.8772 6,666.67 Year 2 7,600 0.7695 5,847.95 Year 3 7,600 0.6750 5,129.78 Year 4 7,600 0.5921 4,499.81 Year 5 7,600 0.5194 3,947.20 Year 6 7,600 0.4556 3,462.46 Year 7 7,600 0.3996 3,037.24 Year 8 7,600 0.3506 2,664.25 Year 9 7,600 0.3075 2,337.06 Year 10 7,600 0.2697 2,050.05 Year 11 7,600 0.2366 1,798.29 Year 12 7,600 0.2076 1,577.45 Year 13 7,600 0.1821 1,383.73 Year 14 7,600 0.1597 1,213.80 Year 15 7,600 0.1401 1,064.73 Year 16 7,600 0.1229 933.98 Year 17 7,600 0.1078 819.28 Year 18 7,600 0.0946 718.66 Year 19 7,600 0.0829 630.41 Total PV 49,782.80 So current value of future payments = $49,782.80