Question

Analyze if the investment in new equipment is profitable based on the information given below. Cost of new equipment $66,000 Yearly expected cash flows to be received $20,000 Expected life 4 years Minimum desired rate of return 10% Present Value of an Annuity of $1 at 10% for 4 years 3.170 a.The internal rate of return is greater than 10% and is not profitable. b.The internal rate of return is greater than 10% and is profitable. c.The internal rate of return is less than 10% and is profitable. d.The internal rate of return is less than 10% and is not profitable.

Answer 1

Answer- The investment in new equipment ,the internal rate of return is less than 10% and is not profitable.

Net present value assuming 10% cost of capital = $(2600).

Net present value = Present value of cash inflows – Total outflows

= ($20000*3.170)-$66000

= $63400-$66000

= $(2600)

The present value factor of an annuity of $1.00 = $66000/$20000 = 3.3.

From the annuity table, the 3.3 factor is closest to the 4-year row at the 8% column.

Hence the IRR is 8%.