Perez Manufacturing Company has an opportunity to purchase some technologically

Question

Perez Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,278,000 per year. The cost of the equipment is $6,666,196.25. Perez expects it to have a 10-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Calculate the internal rate of return of the investment opportunity. (Do not round intermediate calculations.) Indicate whether the investment opportunity should be accepted. Please explain and show work

Explanation / Answer

PV factor for internal rate of return = 6666196.25/1278000= 5.216116 The PV factor 5.516116 for 10 years in PVA of $1 table is closest to 14% Internal rate of return = 14% NO, the investment should not be accepted as Internal rate of return of 14% is less than minimum required rate of 15%

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