A hotel his brother owns. The three years and a salvage value of $2,000 revenue

Question

A hotel his brother owns. The three years and a salvage value of $2,000 revenue of $8,000 per year and cost $1,500 estimates the machine would generate for depreciation. his income tax rate is What amount of net cash inflow from operations would Mr. Kidd expect for the first year if he invests in the machine? Determining the internal rate of return Jacob Elsea, CFO of Colburn Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $200,000 per year. The equipment costs $686,616.20. It is expected to have a five-year useful life and a zero salvage value. Colburn's cost of capital is 10 percent. Calculate the internal rate of return of the investment opportunity. indicate whether Colburn should purchase the equipment.

Explanation / Answer

(10-9B)

(a) IRR is found out using Excel IRR function.

(b) Since IRR is higher than cost of capital, the equipment should be purchased.

Year Cash Flow ($) 0 -6,86,616.20 1 2,00,000 2 2,00,000 3 2,00,000 4 2,00,000 5 2,00,000 IRR = 14.00%

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