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Homework answers / question archive / Kunkle Company wishes to earn 11% annually on its investments

Kunkle Company wishes to earn 11% annually on its investments

Accounting

Kunkle Company wishes to earn 11% annually on its investments. If Kunkle makes an investment that equals or exceeds that rate, it considers it a success. Assume that Kunkle invests $3.2 million and gets $400,000 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. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

 

21 years

 

19 year

 

16 years

 

18 years

 

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Computation of Minimum Value of X (number of years) for which Kunkle will consider the investment a success:

Given,

Investment = $3,200,000

Annual Cash Flows = $400,000

PVF at 11 % for x years = $3,200,000/$400,000 = 8 

 

So, according to Present Value Factor Table, we can say that Kunkle should invest for 21 years at least to ensure investment is a success since PVF at 21 years 8.07507 is greater than 8.

The correct option is 1st "21 years". 

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