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Horngren'S Financial And Managerial Accounting
Found in: Page 1457

Short Answer

Cornell Company is considering a project with an initial investment of $596,500 that is expected to produce cash inflows of $125,000 for nine years. Cornell’s required rate of return is 12%.

14. What is the NPV of the project?

15. What is the IRR of the project?

16. Is this an acceptable project for Cornell?

14. The NPV of the company is $69.531.25.

15. The Annuity factor is 4.772, @15% for 9 years. So the IRR of the project is 15%.

16. This project should be accepted by the company.

See the step by step solution

Step by Step Solution

Step 1: 14. Computing NPV-

Net Cash Inflow

x

Annuity PV Factor

(i = 12%, n = 9)

Present Value

Present value of annuity (a)

$125,000

x

5.32825

$666,031.25

Initial investment (b)

$596,500.00

Net present value (a-b)

$69,531.25

Step 2: 15. Computing annuity factor-

Step 3: 16. Project analysis-

The NPV of the company is greater than zero and the IRR is greater than required rate of return. Thus the company should accept the project.

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