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arancho cucamonga is considering investing in new equipment. the invest will cost $250 the end of...

arancho cucamonga is considering investing in new equipment. the invest will cost $250 the end of 2017. rancho expects the equipment to generate $55 of cash flows annually for 6 years (2108-2023). the frims cost of capital is 6%.

the internal rate of return on the investment is

the present value of the annuity for n=6, i=6% is 4.91732. The minimum annuity rancho must generate to invest in the project is ...
(Show calc)

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Answer #1

Solution:

At IRR, present value of cash inflows is equal to present value of cash outflows

Lets compute present value of cash flows at 8% and 9%

Present value of cash outflows at 8% = $55 * Cumulative PV factor at 8% for 6 peirods

= $55 * 4.62288 = $254.26

Present value of cash outflows at 9% = $55 * Cumulative PV factor at 9% for 6 peirods

= $55 * 4.48592 = $246.73

The minimum annuity ranch must generate to invest in the project = Initial investment / Cumulative PV factor at 6% for 6 periods

= $250 / 4.91732 =$50.84

IRR = 8% + ($254.26 - $250) / ($254.26 - $246.73) = 8.57%

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