Question

Management of a firm with a cost of capital of 12 percent is considering a $100,000 investment with annual cash flow of $44,524 for three years.
a. What are the investment’s 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 cash flows at the end of the third year?
c. The net present value technique assumes that each cash flow is rein-vested at the firm’s cost of capital. What would be the total value of the cash flows at the end of the third year, if the funds are reinvested at the firm’s cost of capital?
d. Why does management know that the reinvestment assumption for the net present value method can be achieved but that achieving the rein-vestment assumption for the internal rate of return is uncertain?


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  • CreatedMarch 19, 2015
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