A Company Has Policy to Invest in New Opportunities If

question 17

True/False

A company has policy to invest in new opportunities if the investment has a positive NPV. See data below:
$$\begin{array} { | r | r | } \hline \text { Initial investment } & \$ 105,000 \\\hline \text { Yearly cash flows } & \$ 30,000 \\\hline \text { Number of years } & 4 \\\hline \text { Residual value } & \$ 10,000 \\\hline & \\\hline\end{array}$$
$\begin{array}{|l|l|l|l|l|l|l|}\hline \text { Present}\\\text {Value of an}\\\text {Annuity of}\\ \$ 1 \\ \hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\\ \hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \\\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \\\hline\end{array}$


$\begin{array}{|r|r|r|r|r|r|r|} \hline\text {Present Value of }\\\$ 1\\ \hline & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \\\hline 1 & 0.952 & 0.943 & 0.935 & 0.92 & 0.917 & 0.909 \\\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.84 & 0.826 \\\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.777 & 0.751 \\\hline 4 & 0.823 & 0.792 & 0.763 & 0.733 & 0.70 & 0.683 \\\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\\hline\end{array}$
If the company has a hurdle rate of 9%, this investment will yield a positive NPV and should be accepted.

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