Return is reasonable given nature of risks involved

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Reference no: EM131902351

1. The Chester Company has just purchased $40,900,000 of plant and equipment that has an estimated useful life of 15 years. Suppose at the end of 15 years this plant and equipment can be salvaged for $4,090,000 (1/10th of its original cost). What will be the book value of this purchase (excluding all other Plant and Equipment) after its first year of use? Use generally accepted (FASB) accounting principles.

a) $34,356,000

b) $38,446,000

c) $36,810,000

d) $38,173,333

2. You are making a $100,000 investment and feel that a 10 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $50,000 in the first year, $55,000 in the second year, and $60,000 in the third year. You expect to pay out $65,000 as an additional investment in the fourth year. Can you accept this project? What is the main reason why?

No, the cash flows are unconventional

No, the IRR is less than the required rate

No, the NPV is -$8,407.90

Yes, the IRR is greater than the required rate

Yes, the NPV is $80,383.85

Reference no: EM131902351

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