Emma Company is considering a capital investment of $178,925 in additional equip

Question

Emma Company is considering a capital investment of $178,925 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual cash flow is expected to be $14,793. Emma requires a 10% return on all new investments.

What is the Internal rate of return factor? (Hint: I am asking for the factor that would be used in the PVA table to look up the internal rate of return, I am not asking for the internal rate of return)

Answer to the nearest 3 decimals

Explanation / Answer

Answer:

First of all we need to know what is Internal Rate of Return.

Internal Rate of Return (IRR) is the discounting rate at which Present Value of all cash flows are equals to Present Value of Cash Outflow.

It means at IRR, PV of Cash Flow = PV of Cash Outflow

PV of Cash Outflow (given) = Capital Investment = $178,925

PV of Cash Flow (Annual Cash Flow $14,793) x PVIFA (IRR, 8 Years) = PV of Cash Outflow

$14,793 x PVIFA (IRR, 8) = $178,925

PVIFA (IRR, 8) = $178,925 / $14,793 = 12.095

Internal Rate of Return factor = 12.095

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