Joetz Corporation has gathered the following data on a proposed investment proje

Question

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

The internal rate of return of the investment is closest to:

Investment required in equipment $ 32,500 Annual cash inflows $ 7,000 Salvage value of equipment $ 0 Life of the investment 15 years Required rate of return 10 %

Explanation / Answer

IRR =NPV of project is zero

NPV =Present value of inflow-outflow

Outflow=7000*PVAF(rate,15years)

PVAF(rate, 15)=32500/7000=4.6428

By seeing in table rate at 15years is close to 20.17%

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