Boleh Inc. has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a $125,000 initial outlay and have a useful life of 10 years. However, Option 1 will generate $22,000 annually in positive after-tax cash flows and would have an after-tax residual value of $2,000. Option 2 will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000.
Use the Internal Rate of Return method to determine which option is the most attractive? (Use a financial spreadsheet to answer this question.)

Question

Boleh Inc. has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a $125,000 initial outlay and have a useful life of 10 years. However, Option 1 will generate $22,000 annually in positive after-tax cash flows and would have an after-tax residual value of $2,000. Option 2 will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000. 
Use the Internal Rate of Return method to determine which option is the most attractive? (Use a financial spreadsheet to answer this question.)

Quizplus · Accepted Answer

The Answer of Boleh Inc. has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a $125,000 initial outlay and have a useful life of 10 years. However, Option 1 will generate $22,000 annually in positive after-tax cash flows and would have an after-tax residual value of $2,000. Option 2 will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000. 
Use the Internal Rate of Return method to determine which option is the most attractive? (Use a financial spreadsheet to answer this question.)

Boleh Inc Has Additional Cash Available for Investment