BAM Co Is Evaluating a Project Requiring a Capital Expenditure of of $806,250

question 54

Essay

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 estimated net income and net cash flow from the project are as follows: $\begin{array}{lll}\text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 75,000 & \$ 285,000 \\2 & 102,000 & 290,000 \\3 & 109,500 & 190,000 \\4 & 36,000 & 125,000 \\\hline&\$322,500&\$890,000\end{array}$ The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine: a) the average rate of return on investment, including the effect of depreciation on the investment, and b) the net present value.

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Definitions:

Par Value

The face value of a bond or stock as stated by the issuing company, which does not necessarily reflect market value.

Contract Rate

Contract rate is the predetermined price agreed upon in a contract for services or goods, typically over a fixed period.

Annual Rate

The Annual Rate is the interest rate or growth rate for a year, often used in financial contexts to depict investments or loans.

Semiannual Rate

A rate of interest or growth that is calculated or applied twice per year.