Olive Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $250,000.The equipment will have an initial cost of $1,300,000 and have an 8 year life.There is no salvage value for the equipment.If the hurdle rate is 10%,what is the internal rate of return? Ignore income taxes.

Question

Quizplus · Accepted Answer

We can use the internal rate of return (IRR) formula to calculate the rate at which the present value of the cash inflows from the equipment equals the initial cost of the equipment. 
PV of cash inflows = initial cost 
We know that the PV of cash inflows is the present value of an annuity of $250,000 for 8 years at the IRR. Using a financial calculator, we can solve for the IRR to be approximately 11.6%. Since the hurdle rate (required rate of return) is 10%, the IRR is greater than the hurdle rate, making this investment acceptable. Therefore, the best choice is C.

Olive Corp Is Considering the Purchase of a New Piece