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10. The CFO of HairBrain Stylists is evaluating a project that costs $96,000. The project will...

10.

The CFO of HairBrain Stylists is evaluating a project that costs $96,000. The project will

generate $21,000 each of the next five years. If HairBrain’s required rate of return is 11

percent, should the project be purchased?

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Answer #1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=21000[1-(1.11)^-5]/0.11

=21000*3.69589702

=$77613.84

NPV=Present value of inflows-Present value of outflows

=77613.84-96000

=($18386.16)(Approx)(Negative).

Hence since NPV is negative;project should not be purchased.

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