Home Security Systems is analyzing the purchase of manufacturing equipment that

Question

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $52,000. The annual cash inflows for the next three years will be: Year Cash Fl ow 24,000 19,000 metho Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method. a. Determine the intemal rate of returm (Do not round intermediate calculations. Enter your answer as a round intemediate caulationster Internal rate of retum b. With a cost of capital of 14 percent, should the equipment be purchased? O Yes O No

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

52000=26000/1.0x+24000/1.0x^2+19000/1.0x^4

Hence x=IRR=16.52%(Approx)

Hence since IRR is greater than the cost of capital;equipment should be purchased.

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