Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-Soda Manufacturing Company provides vending machines for soft drink manufacturers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of 1 year and no sales value.The new equipment has a value of $52,650 with a three-year life.The expected additional cash inflows are $25,000 per year, end of year payments.What is the internal rate of return?
A)24 percent
B)20 percent
C)16 percent
D)12 percent
E)8 percent

Question

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-Soda Manufacturing Company provides vending machines for soft drink manufacturers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of 1 year and no sales value.The new equipment has a value of $52,650 with a three-year life.The expected additional cash inflows are $25,000 per year, end of year payments.What is the internal rate of return?
A)24 percent 
B)20 percent 
C)16 percent 
D)12 percent 
E)8 percent

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the discount rate at which the net present value of the cash inflows is equal to the initial investment. Using a financial calculator, the internal rate of return is approximately 20 percent. This is higher than the company's required rate of return of 15 percent, indicating that the investment is worthwhile. Therefore, the best choice is to purchase the new equipment.

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