BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:YearNet IncomeNet Cash Flow1$75,000 $285,000 2102,000 290,000 3109,500 190,000 436,000 125,000 $322,500 $890,000 The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.Determine the following:a. The average rate of return on investment, including the effect of depreciation on the investment. %b. The net present value. Enter negative values as negative numbers.$

Average annual income = Total net income / No. of year = $322,500 / 4 years = $80,625

Answered: BAM Co. is evaluating a project…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 2CE

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BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 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	$75,000	$285,000
2	102,000	290,000
3	109,500	190,000
4	36,000	125,000
	$322,500	$890,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.

Determine the following:

a. The average rate of return on investment, including the effect of depreciation on the investment.		%
b. The net present value. Enter negative values as negative numbers.	$

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