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.(Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. )(Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Question

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the discount rate at which the present value of cash inflows equals the initial investment. Using a financial calculator or spreadsheet, we can input the following values: 
N = 8 
I/Y = ? (unknown) 
PV = -1300000 
PMT = 250000 
FV = 0 
Solving for I/Y, we find that the internal rate of return is 12.07%. Since the hurdle rate is only 10%, the investment would be profitable and the internal rate of return is greater than 10%. Therefore, the best choice is C.