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3 January, 19:30

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to generate $5,000 per year for three years. If the firm's required rate of return is 10 percent, what is the project's terminal value?

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  1. 3 January, 19:57
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    d) $16,550

    Explanation:

    First, The multiple options to the question

    a) $12,500

    b) $11,550

    c) $14,050

    d) $16,550

    e) $15,000

    Question: To determine the terminal value of the project

    What do we know:

    The Cash flow from the project is $5,000 per year and the rate is 10%

    To determine the future value per year is as follows

    Year 1 = (1+r) ∧2 = (1+0.1) ∧2 = 1.21

    Year 2 = (1+r) ∧1 = (1+0.1) ∧1 = 1.1

    Year 3 = (1+r) ∧0 = (1+0.1) ∧0 = 1

    Based on these determinations, we determine the yearly value as follows

    Year 1 = 5,000 (1.21) = $6,050

    Year 2 = 5,000 (1.1) = $5,500

    Year 3 = 5,000 (1) - = $5000

    The terminal value = The total of the three years

    = $6,050 + $5,500 + $5,000

    = $16,550
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