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Austin Company is investigating four different investment opportunities. Information on the four projects under study is given below: |
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| 1 | 2 | 3 | 4 | |||||||||
| Investment required | $ | (450,000 | ) | $ | (400,000 | ) | $ | (300,000 | ) | $ | (420,000 | ) |
| Present value of cash inflows at a 10% discount rate | 584,550 | 482,460 | 324,750 | 533,500 | ||||||||
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| Net present value | $ | 134,550 | $ | 82,460 | $ | 24,750 | $ | 113,500 | ||||
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| Life of the project | 11 years | 22 years | 11 years | 8 years | ||||||||
| Internal rate of return | 16% | 13% | 12% | 17% | ||||||||
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Because the company’s required rate of return is 10%, a 10% discount rate has been used in the present value computations above. Limited funds are available for investment, so the company can’t accept all of the available projects.
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