7. Assume a $3,000 investment has the following cash flows: Time Cash Flows 1 $1,200 2 1,440 3…

7.    Assume a $3,000 investment has the following cash flows:

 

Time

Cash Flows

1

$1,200

2

1,440

3

1,728

 

The investment has a 0.20 internal rate of return. There are zero taxes and the firm uses straight-line depreciation.

The CFO thinks 0.10 is the correct risk-adjusted discount rate for the investment.

 

a.     Compute economic income of each year.

 

 

Year       Cash Flow

Depreciation Expense

Capital Cost (Interest)

Economic Income

                                                                           

1              $1,200                    $1,000

2                1,440                      1,000

3                1,728                      1,000

 

b.    Compute the investment’s net present value using 0.10 and the cash flows.

c.     Compute the investment’s net present value using 0.10 and the economic incomes.

 

 

 

 

 

 

 

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