Purchase Solution

A Discussion On Net Present Value and Internal Rate of Return

Not what you're looking for?

Ask Custom Question

Julie Kowalis, an investment analyst, wants to know if her investments during the past four years have earned at least a 12% return. Four years ago, she had the following investments:

1. She purchased a small building for $50,000 and rented space in it. She received rental income of $8,000 for each of the four years and then sold the building this year for $55,000.
2. She purchased a small refreshment stand near the city park for $25,000. Annual income from the stand was $5,000 for each of the four years. She sold the stand for $20,000 this year.
3. She purchased an antique car for $5,000 four years ago. She sold it this year to a collector for $7,000.

Required:
1. Using the net present value method, determine whether or not each investment earned at least 12%.
2. Did the investments as a whole earn at least 12%? Explain.

Purchase this Solution
Solution Summary

This solution is comprised of a detailed explanation and calculation to answer Julie Kowalis's return on investment.

Solution Preview

1. Using the net present value method, determine whether or not each investment earned at
least 12%.

Find NPV by finding the present value of each cash flow, including both inflows and outflows, discounted at the project's cost of capital.
We will consider the payment and additional expenses as cash outflow while the cash receipt and saving will be regarded as cash inflow.

NPV = sum of CFt where CF is the cash flow
(1 + k)t k is the ...

Purchase this Solution
Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Operations Management

This quiz tests a student's knowledge about Operations Management

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

View More Free Quizzes
Related BrainMass Solutions

  • capital budgeting tools

    Remember this is a tool that is concerned with the time value of money (Net present value method, 2015). 2. Internal Rate of Return: This is a little more difficult to put into a simple definition.

  • Internal rate of return Note and Letter to the Board of Director

    Discussion Present the results of the location's accounting rate of return on investment, payback, net present value, and internal rate of return side-by-side. Present this information in a table format for easy comparison.

  • Capital budgeting Practice True False Exam Questions

    597431 Capital budgeting Practice True False Exam Questions Net Present Value Practice True false questions 1. The three common discounted cash flow methods are net present value, internal rate of return, and payback. 2.

  • Healthcare Finance: NPV and IRR

    Based on his examples, which do you think is a more effective means of making an investment decision NPV or IRR? Health Care Finance We hear the terms net present value and internal rate of return quite a bit. What are these two investment models?

  • Final recommendations for Superior going public

    Make sure your metrics include payback period, net present value, internal rate of return, and modified internal rate of return. Finally, be sure your recommendation is based on sound financial principles.

  • NPV, IRR, MIRR, Pay Back

    In other words, if you have an investment that requires and produces a number of cash flows over time, the internal rate of return is defined to be the discount rate that makes the net present value of those cash flows equal to zero.

  • Computing NPV and IRR and Comparing Them

    Compute the net present value of each project. Which project should be adopted based on the net present value approach? B. Compute the approximate internal rate of return of each project.

  • Important administrative considerations

    How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods?

  • Different Capital Budgeting Methods

    Second, there are a few capital budgeting methods that managers prefer more than others. These include the net present value (NPV) method, internal rate of return (IRR) method, and the payback method.

  • Cash Flow Problems

    Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement 6. The net present value: A. decreases as the required rate of return increases.

View More Related Solutions