Friday, 22 May 2015

Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 
YearInflow
1$ 12,000  
214,000  
318,000  
422,000  
526,000  


 
The internal rate of return is 12 percent.

 
a.
If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)
  
  Total value of inflows$   
  
b.
If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)
    
  Total value of inflows$   
    
c.Which investment assumption is better?
  
 Reinvestment assumption of NPV

 
Explanation: