Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Laurman Inc. is considering the following project: an initial investment of $50,000 in securities expected to yield annual returns of $6,000 for 10 years. If the required rate of return is 8%, what is the net present value (NPV) of the project?

$1,200

$-8,721

$-2,815

$-5,620

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Verified step by step guidance

Step 1: Understand the concept of Net Present Value (NPV). NPV is a method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and the initial investment. The formula for NPV is: NPV = ∑(Cash Flow_t / (1 + r)^t) - Initial Investment, where 't' is the time period, 'r' is the discount rate, and 'Cash Flow_t' is the cash inflow at time 't'.

Step 2: Identify the given values from the problem. The initial investment is $50,000, the annual cash inflow is $6,000, the duration is 10 years, and the required rate of return (discount rate) is 8%.

Step 3: Calculate the present value of the annual cash inflows using the formula for the present value of an annuity. The formula is: PV = Cash Flow × [(1 - (1 + r)^-n) / r], where 'Cash Flow' is the annual inflow, 'r' is the discount rate, and 'n' is the number of years. Substitute the values: Cash Flow = $6,000, r = 0.08, and n = 10.

Step 4: Subtract the initial investment from the present value of the cash inflows to determine the NPV. Use the formula: NPV = PV - Initial Investment, where 'PV' is the present value calculated in Step 3 and 'Initial Investment' is $50,000.

Step 5: Interpret the result. If the NPV is positive, the project is expected to generate more value than its cost and is considered a good investment. If the NPV is negative, the project is expected to generate less value than its cost and may not be a good investment.