kamara5

4)
The financial manager at Genesis Company is
looking into the purchase of an apartment complex
for $550,000. Net aftertax cash flows are
expected to be $65,000 for each of the next five
years, then drop to $50,000 for four years.
Genesis’ required rate of return is 9% on projects
of this nature. After nine years, Genesis Company
expects to sell the property for aftertax
proceeds of $300,000. What is the respective
internal rate of return (IRR) and net present
value (NPV) on this project?
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A) 13.99%; $166,177.
B) 7.01%; ?$53,765.
C) 6.66%; ?$64,170.
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Your answer: C was incorrect. The correct answer
was B) 7.01%; ?$53,765.
IRR Keystrokes: CF0 = $550,000; CF1 = $65,000; F1
= 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 =
1.
NPV Keystrokes: CF0 = $550,000; CF1 = $65,000; F1
= 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 =
1.
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Q: Shouldn’t F2 be 4 instead of 3?
You have 5 cash flows of 65K follwed by 3 cash flows of 50 k. The fourth 50k cashflow comes with the 300k return from the sale of the property for a last cash flow of 350K