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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Net present value method and internal rate of return method for a service company

 Keystone Healthcare Corp. is proposing to spend $260,820 on an eight-year project that has estimated net cash flows of $42,000 for each of the eight years.

  1. a. Compute the net present value, using a rate of return of 10%.Use the present value of an annuity of $1 table in the chapter (Exhibit 5).
  2. b. Based on the analysis prepared in part (a), is the rate of return (1) more than 10%, (2) 10%, or (3) less than 10%? Explain.
  3. c. Determine the internal rate of return by computing a present value factor for an annuity of $1 and using the present value of an annuity of $1 table presented in the text (Exhibit 5).

a.

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is determined by the business, based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The net present value of the project.

Explanation

Calculation of the net present value of the investment is as follows:

K H Corporation
Net Present Value of the investment
Particulars Amount in $
 Present value of annual net cash flow (<

(b)

To determine

To explain: The rate of return based on the analysis.

(c)

To determine

Internal rate of return method:

Internal rate of return method is one of the capital investment methods which determine the rate of return, wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.

To determine: The internal rate of return for the given project

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