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4 September, 17:20

Clean Tel, Inc. is considering investing in an 11-year project with annual cash inflows of $1,000,000. These cash inflows have an initial investment of $7,139,000. At what discount rate would this present value be the same as the initial investment?

a. 6%

b. 7%

c. 9%

d. 8%

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Answers (1)
  1. 4 September, 20:30
    0
    d. 8%

    Explanation:

    The computation of the discount rate is shown below:

    Initial investment = Present value of cash inflows

    where,

    Initial investment is $7,139,000

    And, the present value of cash inflows

    = Annual cash inflows * discount rate

    We assume the discount rate be X

    $7,139,000 = $1,000,000 * X

    So,

    X = 7139000 : 1000000 = 7.139

    = 8%

    We simply applied the above formula in order to find out the discount rate
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