Use the information below to answer the following question(s).
Moreno Corporation is considering investing in specialized equipment costing $525,000. The equipment has a useful life of 5 years and a residual value of $55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
Moreno Corporation's required rate of return is 14%.
-Is the internal rate of return of the Moreno Corporation investment equal to, higher than, or lower than 14%?

Question

Use the information below to answer the following question(s).
Moreno Corporation is considering investing in specialized equipment costing $525,000. The equipment has a useful life of 5 years and a residual value of $55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
  Moreno Corporation's required rate of return is 14%.
-Is the internal rate of return of the Moreno Corporation investment equal to, higher than, or lower than 14%?

Quizplus · Accepted Answer

To determine the internal rate of return (IRR), we need to calculate the present value of the expected net cash inflows and compare it to the initial investment of $525,000. Using a financial calculator or Excel, we can find that the present value of the net cash inflows is $661,269. Therefore, the IRR is the interest rate that makes the present value of the net cash inflows equal to the initial investment, which is about 25.88%. Since this is higher than the required rate of return of 14%, the answer is B, higher than 14%.

Use the Information Below to Answer the Following Question(s)