Sommers Company Is Evaluating a Project Requiring a Capital Expenditure

Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated life of 5 years and no salvage value. The estimated net income and net cash flow from the project are as follows:
$\begin{array}{ccc} \text {Net Cash}& \text { Net Income Flow}&\text { Year }\\\$ 120,000 & \$ 60,000 & 1 \\110,000 & 50,000 & 2 \\105,000 & 45,000 & 4 \\90,000 & 30,000 & 4 \\80,000 & 20,000 &5\\\underline{\$ 505,000}&\underline{\$205,000}\end{array}$
The company's minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% is shown in the table below:
$$\begin{array} { | l | l | } \hline \text { Present } \text { Value } & \text { Year } \\\hline \text { of} \$ 1 \text { at } 12 \% & 1 \\\hline 0.893 & 2 \\\hline 0.797 & 3 \\\hline 0.712 & 4 \\\hline 0.636 & 5 \\\hline 0.567 & \\\hline &\end{array}$$ Determine (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net present value.

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Sign up to view answer