The Baker Company purchased a piece of equipment with the following expected results: $\begin{array} { l r }
\text { Useful Life } & 7 \text { years } \
\text { Yearly Net Cash Inflow } & \$ 50,000 \
\text { Salvage Value } & - 0 - \
\text { Internal Rate of Return } & 20 \% \
\text { Discount Rate } & 16 \%
\end{array}$ What was the initial cost of the equipment? (Ignore income taxes in this problem.)

Question

The Baker Company purchased a piece of equipment with the following expected results: $\begin{array} { l r } 
\text { Useful Life } & 7 \text { years } \
\text { Yearly Net Cash Inflow } & \$ 50,000 \
\text { Salvage Value } & - 0 - \
\text { Internal Rate of Return } & 20 \% \
\text { Discount Rate } & 16 \%
\end{array}$ What was the initial cost of the equipment? (Ignore income taxes in this problem.)

Quizplus · Accepted Answer

The initial cost of the equipment can be determined by calculating the present value of the annuity of the yearly net cash inflows using the internal rate of return (IRR) of 20%. The present value factor for an annuity of $50,000 over 7 years at 20% is approximately 3.6048. Thus, the initial cost is $50,000 * 3.6048 = $180,240, which is closest to $180,250.

The Baker Company Purchased a Piece of Equipment with the Following