Velma and Keota (V&K) is a partnership that owns a small company. It is consider

Question

Velma and Keota (V&K) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a five-year useful life, will cost $19,680.96, and will generate expected cash inflows of $4,800 per year. The second investment is expected to have a useful life of three years, will cost $12,885.48, and will generate expected cash inflows of $5,000 per year. Assume that V&K has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required Calculate the internal rate of return of each investment opportunity. (Do not round intermediate calculations.) Based on the internal rates of return, which opportunity should V&K select?

Explanation / Answer

First investment opportunity: PV factor for internal rate of return=19680.96/4800= 4.1002 Internal rate of return = 7% Second investment opportunity: PV factor for internal rate of return=12885.48/5000= 2.57710 Internal rate of return = 8% Second investment opportunity should be selected

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