Question

Pendleton Parks is investigating the purchase of new maintenance equipment. The equipment would cost $5,000 and have a five year life. It would save $500 per year in cash operating costs. In addition, because it would enhance the attractiveness of various parks and facilities, management estimates there would be an average of 1,000 additional paying visitors per year. The average contribution margin realized per visitor is $1.

The approximate internal rate of return promised by this investment = _________%

Answer 1

Answer:

calculation of Internal rate of return:

Particulars	Period	Amount	PVF@10%	Present Value	PVF@5%
Outflows:
Cost of equipment	0	$5,000	1	$5,000	1	$5,000
Total Outflows (a)				$5,000		$5,000
Inflows:
Saving in cost	1-5 Years	$500	2.88	$1440	3.38	$1,690
Collections	1-5	$1000	2.88	$2,880	3.38	$3,380
Total Inflows (b)				$4,320		$5070
Net present value (a-b)				($680)		$70

Internal Rate of return = 5% + {(70/ 750) x 5%}

= 5.47%

The approximate internal rate of return promised by this investment = 5.47%