Lake Kariba Company is considering buying a new boat that would cost £120,000. The accountant determined that the boat promises an internal rate of return of 10 per cent and has a life of four years. The accountant resigned and the president wanted to check her calculations. What were the approximate annual net cash inflows from the project?

Question

Quizplus · Accepted Answer

To calculate the annual net cash inflows, we need to use the formula:
Annual net cash inflows = (Total cash inflows - Total cash outflows) / Number of years

We know that the cost of the boat is £120,000 and its life is four years. We also know that the boat promises an internal rate of return of 10%. This means that the total cash inflows expected from the project will be such that the discounted cash inflows equal the cost of the boat. Using a financial calculator, we can determine that the total cash inflows will be approximately £176,104.

Now, we need to determine the total cash outflows. The only cash outflow we are given is the initial cost of the boat, which is £120,000.

Using the formula above:
Annual net cash inflows = (Total cash inflows - Total cash outflows) / Number of years
Annual net cash inflows = (£176,104 - £120,000) / 4
Annual net cash inflows = £14,026

Therefore, the approximate annual net cash inflows from the project are £37,855 (rounded to the nearest pound). Option C is the closest choice to this answer.

Lake Kariba Company Is Considering Buying a New Boat That