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Korvikt [17]
3 years ago
10

Assume that you are a vending machine dealer. You plan to purchase a vending machine for $200,000. One year later, you are expec

ted 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.
Business
1 answer:
stepladder [879]3 years ago
4 0

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% =<u> 12,000</u>

VALUE  200,000             16,000

16,000 / 200,000 = 8%

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Use the same formula as in part A.

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