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 net cash flow from the project is as follows:
Year Net Cash Flow
1 $285,000
2 290,000
3 190,000
4 125,000
$890,000
?The company's minimum desired rate of return is 12%.
Determine the average rate of return on the investment.
Use the formula that you were given in class to determine the present value factor of $1.00 at 12% for each of the 4 years. SHOW THE FORMULA AND PLACE THESE NUMBERS IN A CHART.
Determine and show the net present value for the 4 years, adding these numbers to the previously created chart.
Should the BAM CEO do this deal? Why/why not?