Golab Roofing is considering the purchase of a crane that would cost $69,846, would have a useful life of 6 years, and would have no salvage value. The use of the crane would result in labor savings of $21,000 per year. The internal rate of return on the investment in the crane is closest to (Ignore income taxes.):Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

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To find the internal rate of return (IRR), we need to compare the initial investment to the annual savings, using the formula for the present value of an annuity since the crane has no salvage value. The initial investment is $69,846, and the annual labor savings is $21,000. We are looking for the rate that makes the present value of the savings equal to the cost of the crane. Without the exact tables (Exhibit 14B-1 and 14B-2), we estimate the IRR based on the given options. The closest rate that would yield a present value of approximately $69,846 for a 6-year annuity of $21,000 is around 20%. This is because the factor for an annuity at 20% for 6 years should closely multiply to $69,846 when multiplied by $21,000.

Golab Roofing Is Considering the Purchase of a Crane That