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A Discussion On Net Present Value and Internal Rate of Return

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.

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 ...

Solution Summary

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

$2.19