Wilson Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $50,000.The equipment will have an initial cost of $600,000 and have an 8 year life.The salvage value of the equipment is estimated to be $100,000.If the hurdle rate is 10%,what is the internal rate of return?

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that makes the net present value (NPV) of the investment equal to zero:

NPV = -Initial cost + PV of net cash flows + Salvage value
NPV = -600,000 + 50,000(PVIFA10%,8) + 100,000/(1+10%)^8
NPV = 0

Using trial and error or a financial calculator, we find that the IRR is around 13.6%, which falls between 10% and 15%. Therefore, the best choice is C. This means that the project is expected to generate a return higher than the hurdle rate of 10%, making it a good investment for Wilson Corp.

Wilson Corp Is Considering the Purchase of a New Piece