Q4TI - Horngren'S Financial And Managerial Accounting

Question

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?

Step-by-Step Solution

Answer

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.

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-

$\begin{array}{c}\text{Annuity factor}=\frac{\text{Investment}}{\text{Annual cash flow}}\\ =\frac{\$596,500}{\$125,000}\\ =4.772\end{array}$

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.