Answer:
- Project not acceptable as NPV is negative at -$9,553.10
- Time-adjusted rate of return = 12.41%
Explanation:
The Net Present value works by deducting the cost from the present value of benefits. If this amount is positive then the project is a good one.
= Present value of benefits - Present value of cost
Benefits are $9,000 a year for 10 years. This is constant so is annuity.
Cost is the $50,000 purchase price.
= (9,000 * Present value interest factor of annuity, 10 years, 18%) - 50,000
= (9,000 * 4.4941) - 50,000
= -$9,553.10
Project is not acceptable because NPV is negative.
Time-adjusted rate of return is the Internal Rate of Return which is the return that brings NPV to zero.
Use Excel or a Financial calculator for it(Worksheet attached):
= 12.41%
