Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 49

Working Backward: Determine Initial Investment Based on Internal Rate of Return (IRR) Gene, Inc., invested in a machine with a useful life of six years and no salvage value. It depreciated the machine using the straight-line method; the machine was expected to produce a $20,000 annual cash inflow from operations, after cash expenses but before taxes. Gene has determined that the time-adjusted rate of return (IRR) on the investment is 10 percent. The firm is in the 20 percent tax bracket. The appropriate annuity factor for this situation is 4.355.

Required What was the cost of the machine?