The discussion activity for Module 6 entails computing net present value (NPV) and internal rate of return (IRR) and solving capital budgeting problems.

For your computations, you can use the interest tables provided in the textbook's appendixes, software such as Excel, a financial calculator, or any of the pertinent computer programs included with South-Western's Investment Analysis Calculator. [**Hint:** Most useful for solving NPV and IRR problems with the Investment Analysis Calculator are programs under the sections Financial Calculator and Rate of Return (Dollar-Weighted or IRR).]

** **

**Problem 2**

Management of a firm with a cost of capital of 12 percent is considering a $100,000 investment with annual cash flow of $44,524 for three years.

a. What are the investment's net present value and internal rate of

return?

b. The internal rate of return assumes that each cash flow is re-invested

at the internal rate of return. It that investment rate is achieved, what is

the total value of the cash flows at the end of the third year?

c. The net present value technique asumes that each cash flow is reinvested at the firm's cost of capital. What would be the total value of the cash flows at the end of the third year, if the funds are reinvested at the firms's cost of capital?

** **

**Problem 5**

An investment costs $10,000 and offers annual cash inflow of $1,770 for ten

years. According to both the net present value and internal rate of return

methods of capital budgeting, should the firm make this investment if its cost

of capital is (a) 10 percent or (b) 14 percent?

Subject | Mathematics |

Due By (Pacific Time) | 10/26/2014 12:00 am |

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