Chow Company is considering the purchase of a piece of equipment costing $142,500. The equipment has an eight-year useful life and will generate $30,000 in annual cash flows. The company has a 10% required rate of return and uses the straight-line depreciation method. The internal rate of return on this equipment is closest to
Answer:13.30%
Working Notes for the above answer is as under
We have been provided with the information as
equipment costing $142,500.
eight-year useful life
It generate $30,000 in annual cash flows.
The company has a 10% required rate of return
Now we will calculate IRR
Year
Cash Flow
0
-142500
1
30,000
2
30,000
3
30,000
4
30,000
5
30,000
6
30,000
7
30,000
8
30,000
We do not have provided with the tax rate so we do not consider depreciation effect. Depreciation effect will only considered when Tax rate is given
IRR= 142500- 30,000(1+r)+30000(1+r)2+30000(1+r)3+30000(1+r)4+30000(1+r)5+30000(1+r)6+30000(1+r)7+30000(1+r)8
By trial and error method we solve this equation
irr=13.30
13.30%
