Big Al's is considering the purchase of a capital investment costing $15 000.Annual cash savings of $5000,with a present value at 15 per cent of $18 923,are expected for the next six years.Given this information,which of the following statements is true?

Question

Quizplus · Accepted Answer

The present value of the cash savings is greater than the cost of the investment ($18,923 > $15,000). This means that the investment is expected to generate a positive return. To calculate the actual rate of return, we need to calculate the internal rate of return (IRR). Using a financial calculator or spreadsheet software, we can find that the IRR for this investment is approximately 21.1%. Since the IRR is greater than the required rate of return (15%), the investment offers an actual rate of return of more than 15%. Therefore, choice C is the correct answer.

Big Al's Is Considering the Purchase of a Capital Investment