Question

Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.):

Useful life 12 years
Yearly net cash inflow $ 60,000
Salvage value $ 0
Internal rate of return 14 %
Required rate of return 10 %
The initial cost of the equipment is closest to:________.
A. $(52,445)
B. $(15,885)
C. $(139,325)
D. $(95,885)

Answer 1

Initial cost of the equipment = $339,600

Step-by-step explanation:

Given:

Yearly net cash inflow = $60,000

Salvage value = $0

Internal rate of return = 14% = 0.14

Required rate of return = 10%

Find:

Initial cost of the equipment = ?

Computation:

Annuity factor of internal rate of return

`(1-(1+r)^(-n))/(r) \\\\(1-(1+0.14)^(-12))/(0.14) \\\\(1-(1.14)^(-12))/(0.14) \\\\5.66`

Initial cost of the equipment = Yearly net cash inflow × Annuity factor of internal rate of return

Initial cost of the equipment = $60,000 × 5.66

Initial cost of the equipment = $339,600