lindslu Posts: 2, Reputation: 1 New Member #1 Aug 15, 2007, 08:08 PM
Average rate of return, net present value, internal rate of return, & payback period
CAM Company is evaluating a project requiring a capital expenditure of \$619,200. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year Net Income Net Cash Flow

1 \$ 65,000 \$ 240,000

2 92,000 260,000

3 100,000 160,000

4 52,600 70,000

Total \$ 309,600 \$ 730,000

The company’s minimum desired rate of return is 12%. The present value at compound interest of 12% for 1, 2, 3, and 4 years is .893, 797, 712, and .636 respectively.

Determine:

A.) Average Rate of Return (giving effect to depreciation on the investment)

B.) Net Present Value

C.) Internal Rate of Return

D.) Payback Period
 Martha10 Posts: 2, Reputation: 1 New Member #2 May 18, 2008, 08:55 AM
Well I can start by giving you some formula which you can apply eventually to find your answers :

IRR : L + [ __P____ X ( H - L )
 Martha10 Posts: 2, Reputation: 1 New Member #3 May 18, 2008, 09:03 AM
Sorry Send My Message Before Finishing My Reply :

The Irr Converts The Npv Into A %. This Is Done Because People Are More Familiar With Rates Of Rates Of Interest So Understand More Clearly That Borrowing At 10% And Investing At 13 % Is Good For Example.

Whereas Borring At 10% Getting A Npv Of \$52,000 May Not Be So Obvious.

The Irr Is The Point Where The Npv Is O.

L : Is The Lower Rate Of Increase - Example 10%
H : Is The Higher Rate Of Increase - Example 20%
P : Is The Positive Npv : Example 52,261
N: Is The Negative Npv : Example 119,846

Formula Will Be : L + [ P/ P - N X ( H - L ]
So 10% + [ 52,261/52,261 + 119,846 X ( 20% - 10%)
:)
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #4 May 18, 2008, 03:09 PM
Just as a note, lindslu, this belongs in finance, not accounting. Or better yet, since it's homework, in the homework help section.

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