Kunkle Company wishes to earn 20% annually on its investments. If Kunkle makes an investment that equals or exceeds that rate, it considers it a success. Assume that Kunkle invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X (number of years) for which Kunkle will consider the investment a success? Assume that Kunkle can't invest for fractional parts of a year.
A) 4 years.
B) 6 years.
C) 7 years.
D) 9 years.

Question

Quizplus · Accepted Answer

The investment is successful when the present value of the ordinary annuity at 20% will be $2 million. This is when the PV factor (from Table 4) is at least 4.0, so that when the PV factor is multiplied by the $500,000 annual amount received, the result is at least $2 million. In Table 4, at i = 20%, the factor passes the 4.0 level in year 9.

Kunkle Company Wishes to Earn 20% Annually on Its Investments