Question

Analyze if the investment in new equipment is profitable based on the information given below. Cost of new equipment $66,000 Yearly expected cash flows to be received $20,000 Expected life 4 years Minimum desired rate of return 10% Present Value of an Annuity of $1 at 10% for 4 years 3.170
a.The internal rate of return is greater than 10% and is not profitable.
b.The internal rate of return is greater than 10% and is profitable.
c.The internal rate of return is less than 10% and is profitable.
d.The internal rate of return is less than 10% and is not profitable.

Answer 1

Answer:

D

Explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator  

Cash flow in year 0 =  $-66,000

Cash flow each year from year 1 to 4 = $20,000

IRR = 8.16%

For the project to be profitable, the IRR has to be greater than the desired rate of return

Since the IRR (8.16%) is lower than the desired rate of return (10%), the project isn't profitable

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.