Question

Assume that you are a vending machine dealer. You plan to purchase a vending machine for $200,000. One year later, you are expected to sell it back and receive $224,000 as cash. What is the IRR (internal rate of return) on this investment? Be sure to apply the definition of IRR and show your work.
3 points>

In order to buy the vending machine, you plan on borrowing $80,000 from Bank at 5% of interest rate and raise $120,000 from investors at 10% of cost of equity, are you going to accept this project? Why? (Tax rate is 30%). Show your work.

Answer 1

Answer:

1) 22%

2) YES as the return in the investment is 12% while the average cost of capital in this case; is of 8% hence there is a gain above the minimum accepted return.

Explanation:

$-200,000 + \frac{224,000}{1+ IRR} = 0$

IRR = 12%

weighted-average cost of capital:

DEBT      80,000 x 5%   =   4,000

EQUITY 120,000 x 10% = 12,000

VALUE  200,000             16,000

16,000 / 200,000 = 8%