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Turner Video will invest $84,500 in a project. The firm’s cost of capital is 6 percent....

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Accounting

Turner Video will invest $84,500 in a project. The firm’s costof capital is 6 percent. The investment will provide the followinginflows. Use Appendix A for an approximate answer but calculateyour final answer using the formula and financial calculatormethods.

YearInflow
1$28,000
230,000
334,000
438,000
542,000


The internal rate of return is 12 percent.


a. If the reinvestment assumption of the netpresent value method is used, what will be the total value of theinflows after five years? (Assume the inflows come at the end ofeach year.) (Do not round intermediate calculations andround your answer to 2 decimal places.)
  

Total value of inflows: ___________________.


b. If the reinvestment assumption of the internalrate of return method is used, what will be the total value of theinflows after five years? (Use the given internal rate ofreturn. Do not round intermediate calculations and round youranswer to 2 decimal places.)
  

Total value of inflows: ___________________.


c. Which investment assumption isbetter?

Reinvestment assumption of IRR
Reinvestment assumption of NPV

Answer & Explanation Solved by verified expert
3.9 Ratings (438 Votes)

1 Cost of capital, 6%
Year Inflow FV of cash inflow
1 28000 35349.35488 28000*(1.06)^4
2 30000 35730.48 30000*(1.06)^3
3 34000 38202.4 34000*(1.06)^2
4 38000 40280 38000*1.06
5 42000 42000 42000
191562.2349
Round 191562.23
2 IRR, 12%
Year Inflow FV of cash inflow
1 28000 44058.54208 28000*(1.12)^4
2 30000 42147.84 30000*(1.12)^3
3 34000 42649.6 34000*(1.12)^2
4 38000 42560 38000*1.12
5 42000 42000 42000
213415.9821
Round 213415.98
3 Reinvestment assumption is better in NPV assumption since it is not easy to earn internal rate of return double than cost of capital.
3
I hope this satisfies the answer.
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