Question

g (Ignore income taxes in this problem.) Overland Corporation has gathered the following data on a proposed investment project: Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables. Investment required in equipment $ 440,000 Annual cash inflows $ 77,000 Salvage value of equipment $ 0 Life of the investment 20 years Discount rate 13 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. The internal rate of return on the investment is closest to:

Answer 1

Calculating the internal rate of return (IRR) for Overland Corporation's project cannot be done without more detailed cash flow information or the methodology used. The Gizmo Company evaluates its investments with the consideration of a social benefit, effectively adjusting their decision-making process. Firms should consider their alternative investment opportunities and the cost of capital when deciding whether to invest with available cash or borrow.

Step-by-step explanation:

The question seeks to determine the internal rate of return (IRR) for Overland Corporation based on their proposed investment project. Unfortunately, without the actual cash flow details year by year or the formula used for deriving the IRR, it's not possible to calculate the IRR precisely. However, I can explain that typically, the IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. To find the IRR, one would generally experiment with different discount rates until finding the rate that delivers an NPV of zero, which is best done using financial calculators or software designed for such calculations.

The Gizmo Company is planning to develop new household gadgets with a consideration of social benefit. If the firm can incorporate the 5% return to society, it would effectively adjust its perceived rate of return. For example, if the interest rate is at 9% and the firm is able to capture the 5% social return, it can invest as if the rate of return is effectively 4%, thus opting to invest more based on the modified expectations.

On the other hand, when discussing whether a firm should make an investment earning a 6% return without needing to borrow any capital, avoiding the 8% interest rate that borrowing would entail, one should consider if the return of the investment outweighs any alternate investment opportunities or cost of capital. If there are no better opportunities and the cost of capital is less than 6%, it may be a good choice to proceed with the investment. However, this decision should also consider other factors, like risk and future cash flow certainty.