Wilson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $50,000.The equipment will have an initial cost of $600,000 and have an 8-year life.The salvage value of the equipment is estimated to be $100,000.If the hurdle rate is 10%,what is the internal rate of return? (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 find the internal rate of return, we need to calculate the present value of the expected cash flows and set it equal to the initial cost of the equipment.

Using the present value of an annuity formula, we can calculate the present value of the $50,000 annual cost savings over the 8-year life of the equipment:

PV = $50,000 x [(1 - 1/1.10^8) / 0.10] = $287,196.67

Then, using the present value of a single sum formula, we can calculate the present value of the salvage value:

PV = $100,000 / 1.10^8 = $46,274.68

The total present value of the cash flows is:

PV = $600,000 - $287,196.67 - $46,274.68 = $266,528.65

We want to find the interest rate that makes the present value of the cash flows equal to the initial cost:

$266,528.65 = $600,000 / (1 + IRR)^8

Solving for IRR, the internal rate of return is approximately 12%, which falls within the range of 10-15%. Therefore, the best choice is C.