Question

oetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment required in equipment $ 30,000 Annual cash inflows $ 6,000 Salvage value of equipment $ 0 Life of the investment 15 years Required rate of return 10 % The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided. The internal rate of return of the investment is closest to:

Answer 1

Answer:

10.25%

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 = cash inflow - cash outflow

cash outflow = depreciation expense

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

$30,000 / 15 = $2000

Cash flow = $6000 - 2000 = $4000

Cash flow in year 0 = $-30,000

Cash flow in year 1 to 15 = 4,000

IRR = 10.24%

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.