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18 July, 10:52

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12%. (Round off the answer to two decimal places.) a. $1,889.45 b. $1,626.57 c. $3,336.78 d. $2,486.23 e. $2,389.66

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  1. 18 July, 14:12
    0
    Terminal value

    = 500 (1+0.12) 3 + 500 (1+0.12) 2 + 500 (1+0.12) 1 + 500 (1+0.12) 0

    = 500 (1.12) 3 + 500 (1.12) 2 + 500 (1.12) 1 + 500 (1.12) 0

    = 702.464 + 627.2 + 560 + 500

    = $2,389.66

    The correct answer is E

    Explanation:

    Terminal value is a function of number of years cashflow for each year can be re-invested at the appropriate discount rate. The cashflow for year 1 can be re-invested for 3 years since the life of the project is 4 years. cashflow for year 2 can be re-invested for 2 years, cashflow for year 3 can be re-invested for 1 year and cashflow for year 4 can be re-invested for 0 year.
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