Kunkle Company Wishes to Earn 20% Annually on Its Investments

question 110

Multiple Choice

Kunkle Company wishes to earn 20% annually on its investments. If it makes an investment that equals or exceeds that rate, it considers it a success. Assume that it invests $2 million and gets $500,000 in return at the end of each year fox X years. What is the minimum value of X for which it will consider the investment a success? Assume that it can't invest for fractional parts of a year.

• A)4 years.
• B)6 years.
• C)7 years.
• D)9 years.The investment is successful when the present value of the ordinary annuity = $2 million.This is when the PV factor (from Table 4) is at least 4.0, so that multiplied by $500,000; it is at least $2 million.In Table 4, at i=20%, the factor passes the 4.0 level in year 9.