Problem:
Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. 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
|
$ 90,000
|
$210,000
|
|
2
|
80,000
|
200,000
|
|
3
|
40,000
|
160,000
|
|
4
|
30,000
|
150,000
|
|
$240,000
|
$720,000
|
The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is .870, .756, .658, and .572, respectively.
Required:
Question: Determine (a) the average rate of return on investment, using straight line depreciation, and (b) the net present value
Note: Provide support for your rationale.