An investment opportunity costing

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Reference no: EM13682195

Use the following information for the question(s):

# of Periods Annuity Factors
10% 12% 14% 16%
5 3.80 3.61 3.28 2.99
10 6.15 5.65 4.83 4.19

# of Periods Single Payment Factors
5 .621 .567 .476 .402
10 .386 .322 .227 .162

An investment opportunity costing $70,000 is expected to yield after tax cash flows of $20,000 per year for five years. Compute the following based on a cost of capital of 12%.

1. The net present value of the investment discounted at the cost of capital:

A. $72,200
B. $2,200
C. $30,000
D. - $2,200

2. The payback period of this investment is:

A. 2.85 years
B. 3.00 years
C. 3.50 years
D. 3.85 years

3. The discounted payback period of this investment is:

A. The same as the payback period
B. Longer the payback period
C. Shorter than the payback period
D. Can't be calculated from the information given

4. The approximate internal rate of return (IRR) of this investment from just the information given is:

A. 10-12%
B. 12-14%
C. 14-16%
D. Over 16%

5. Based solely on the quantitative factors, should the company make this investment?

A. No, because the IRR is below the cost of capital.
B. Yes because there is a positive net present value.
C. No, because the cost of capital is greater than the IRR.
D. Yes, because the payback is more than the IRR.

Reference no: EM13682195

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