Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.): Useful life 6...
Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.):
| Useful life | 6 | years | |
| Yearly net cash inflow | $ | 45,000 | |
| Salvage value | $ | 0 | |
| Internal rate of return | 18 | % | |
| Required rate of return | 14 | % | |
The initial cost of the equipment is closest to:
Multiple Choice
-
$175,005
-
$235,890
-
Cannot be determined from the given information.
-
$157,410
Homework Answers
Answer
- Correct Answer = Option #4: $ 157,410
- At IRR, present value of cash inflows = present value of cash
outflow
OR
present value of cash inflows = initial cost of investment. - Present value annuity factor for IRR 18%
= 1/(1.18)1+(1.18)2+(1.18)3+(1.18)4+(1.18)5+(1.18)6
= 3.498 - Cost of Equipment = Annual Cash inflow x Present value
factor
= $ 45000 x 3.498
= $ 157,410 Answer
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