Question

Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.): Useful life 12years Yearly net cash inflow $60,000 Salvage value$0 Internal rate of return 14% Required rate of return 10% Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The initial cost of the equipment is closest to: Multiple Choice $660,100 $339,600 $349,950 Cannot be determined from the given information.

Answer 1

Answer:

$339,600

Explanation:

The internal rate of return is the relationship between the price of the equipment and their yearly cash flow. the IRR makes the net present value equal to zero thus, it makes the present value of the yearly cashflow equal to the cost:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 60,000.00

time 12

rate 0.14

$60000 \times \frac{1-(1+0.14)^{-12} }{0.14} = PV$

PV $339,617.5275

From the given option:

$ 339,600 is the closest option.