The Baker Company purchased a piece of equipment with the following expected results:
$\begin{array}{|l|r|}
\hline \text { Useful Life } & 7 \text { years } \
\hline \text { Yearly Net Cash Inflow } & \$ 50,000 \
\hline \text { Salvage Value } & -0 \
\hline \text { Internal Rate of Return } & 20 \% \
\hline
\end{array}$
$$\begin{array} { | l | l |}
\hline \text { Discourt Rate } & 16 \%\\hline
\end{array}$$
What was the initial cost of the equipment? (Ignore income taxes in this problem.)(Round your PV factor to 5 decimal places and final answer to nearest whole dollar amount.)

Question

The Baker Company purchased a piece of equipment with the following expected results:
$\begin{array}{|l|r|}
\hline \text { Useful Life } & 7 \text { years } \
\hline \text { Yearly Net Cash Inflow } & \$ 50,000 \
\hline \text { Salvage Value } & -0 \
\hline \text { Internal Rate of Return } & 20 \% \
\hline
\end{array}$
$$\begin{array} { | l | l |} 
\hline \text { Discourt Rate } & 16 \%\\hline
\end{array}$$
What was the initial cost of the equipment? (Ignore income taxes in this problem.)(Round your PV factor to 5 decimal places and final answer to nearest whole dollar amount.)

Quizplus · Accepted Answer

The initial cost of the equipment can be determined by calculating the present value of the yearly net cash inflows at the given discount rate. Using the formula for the present value of an annuity, the present value factor for a 16% discount rate over 7 years can be calculated, and then multiplied by the yearly net cash inflow of $50,000 to find the initial cost.

The Baker Company Purchased a Piece of Equipment with the Following