Question

QUESTION 5
A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10
percent and the following cash flow schedule:
Year 1: $3,000
Year 2: $2,000
Year 3: $2,000
Determine the project's NPV.

Answer 1

A) $883 15%

A) $883 15%B) $243 20%

A) $883 15%B) $243 20%C) $243 15%

A) $883 15%B) $243 20%C) $243 15%D) $883 20%

A) $883 15%B) $243 20%C) $243 15%D) $883 20%The correct answer was D

To determine the NPV, enter the following:

To determine the NPV, enter the following:PV of $3,000 in year 1 = $2,727, PV of $2,000 in year 2 = $1,653, PV of $2,000 in year 3 = $1,503. NPV = ($2,727 + $1,653 + $1,503) - $5,000 = 883.

To determine the NPV, enter the following:PV of $3,000 in year 1 = $2,727, PV of $2,000 in year 2 = $1,653, PV of $2,000 in year 3 = $1,503. NPV = ($2,727 + $1,653 + $1,503) - $5,000 = 883.You know the NPV is positive, so the IRR must be greater than 10%. You only have two choices, 15% and 20%. Pick one and solve the NPV. If it is not close to zero, then you guessed wrong; select the other one. [3000 / (1 + .2)1 + 2000 / (1 + .2)2 + 2000 / (1 + .2)3] - 5000 = 46 This result is closer to zero (approximation) than the $436 result at 15%. Therefore, the approximate IRR is 20%.

hope it will help you