Question

welch corporation is planning an investment with the following characteristics (ignore income taxes.): useful life 10 years yearly net cash inflow $ 90,000 salvage value $ 0 internal rate of return 12% required rate of return 8% click here to view exhibit 12b-1 and exhibit 12b-2, to determine the appropriate discount factor(s) using the tables provided. the initial cost of the equipment is closest to:

Answer 1

To determine the initial cost of the equipment, we need to use the appropriate discount factors provided in the exhibits. By dividing the net cash inflow by the discount factor, we find that the initial cost is closest to $280,000.

Step-by-step explanation:

To determine the initial cost of the equipment, we need to find the present value of the net cash inflows over the useful life of 10 years. Since the required rate of return is 8% and the internal rate of return is 12%, we can use the exhibit tables to find the appropriate discount factors.

Using Exhibit 12b-1, we find that the discount factor for 10 periods and 8% rate is 0.4632. Using Exhibit 12b-2, we find that the discount factor for 10 periods and 12% rate is 0.3219.

To calculate the initial cost, we divide the yearly net cash inflow of $90,000 by the discount factor of 0.3219, which gives us $279,941.21. Therefore, the initial cost of the equipment is closest to $280,000.

Answer 2

The closest initial cost of the equipment, based on the provided information and discount factors from the exhibits, is approximately $570,760.

Step-by-step explanation:

To calculate the initial cost of the equipment, we'll use the formula for present value of an annuity:

`\[ \text{PV of Annuity} = \text{Cash inflow} * \left( (1 - (1 + r)^(-n))/(r) \right) \]`

Given: Cash inflow per year = $90,000, Internal Rate of Return (IRR) = 12%, Required Rate of Return = 8%, and the useful life of the investment is 10 years.

Using Exhibit 12b-1 and 12b-2, we find the discount factor for 12% (IRR) and 8% (Required Rate of Return) for 10 periods, which are 5.6502 and 6.7101 respectively.

Now, applying the formula:

`\[ \text{PV of Annuity} = \$90,000 * \left( (1 - 5.6502)/(0.12) \right) \approx \$570,760 \]`

Thus, the closest initial cost of the equipment is approximately $570,760. This calculation derives the present value of the cash inflows discounted back to the present time, considering the given rates and useful life of the investment. The PV of the annuity represents the initial cost of the equipment that would justify the projected cash flows over the specified time frame, ensuring an IRR of 12% against the required rate of return of 8%.