Question

Cowboy Recording Studio is considering the investment of $143,400 in new recording equipment. It is estimated...

Cowboy Recording Studio is considering the investment of $143,400 in new recording equipment. It is estimated that the new equipment will generate additional cash flow of $21,000 per year for each year of its 7-year life and will have a salvage value of $13,500 at the end of its life. Cowboys’ financial managers estimate that the firm’s cost of capital is 8%. Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

Required:

  1. Calculate the net present value of the investment.
  2. Calculate the present value ratio of the investment.
  3. What is the internal rate of return of this investment, relative to the cost of capital?
  4. Calculate the payback period of the investment.

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