Linda's Graphic Designs is considering the purchase of a used color Laser Printer costing $38,400. The Printer would generate an annual cash flow of $16,000 for three years. At the end of three years, the Printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the internal rate of return to the nearest percent for the Printer, assuming no taxes are paid?

Question

Quizplus · Accepted Answer

To calculate IRR, we need to find the discount rate at which the present value of the cash inflows equals the initial cost. Using the straight-line depreciation method, the annual depreciation expense would be $12,800 ($38,400/3). Therefore, the annual after-tax cash flow would be $3,920 [($16,000 - $12,800) x (1 - 0.3)]. The present value of these cash flows can be calculated using the formula:
PV = CF / (1+r)^n
where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

Using a spreadsheet or financial calculator, we can find that the IRR for this investment is approximately 12%. Therefore, the best choice is C.

Linda's Graphic Designs Is Considering the Purchase of a Used