(Present value tables are needed.)Moreno Corporation is considering investing in specialized equipment costing $525,000.The equipment has a useful life of 5 years and a residual value of $55,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are: $$\begin{array} { | c | c r | }
\hline \text { Year 1 } & \$ & 245,000 \
\hline \text { Year 2 } & \$ & 190,000 \
\hline \text { Year 3 } & \$ & 152,000 \
\hline \text { Year 4 } & \$ & 112,000 \
\hline \text { Year 5 } & \$ & 95,000 \
\hline & \$ & 794,000 \
\hline
\end{array}$$ Moreno Corporation's required rate of return is 14%.
-
Is the internal rate of return of the investment equal to,higher than,or lower than 14%?

Question

(Present value tables are needed.)Moreno Corporation is considering investing in specialized equipment costing $525,000.The equipment has a useful life of 5 years and a residual value of $55,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are: $$\begin{array} { | c | c r | } 
\hline \text { Year 1 } & \$ & 245,000 \
\hline \text { Year 2 } & \$ & 190,000 \
\hline \text { Year 3 } & \$ & 152,000 \
\hline \text { Year 4 } & \$ & 112,000 \
\hline \text { Year 5 } & \$ & 95,000 \
\hline & \$ & 794,000 \
\hline
\end{array}$$ Moreno Corporation's required rate of return is 14%.
-
Is the internal rate of return of the investment equal to,higher than,or lower than 14%?

Quizplus · Accepted Answer

To determine the internal rate of return (IRR), we need to calculate the present value of the expected net cash inflows and compare it with the initial investment. Using the formula:
PV = CF / (1+r)n
where PV is the present value, CF is the expected net cash inflow, r is the required rate of return, and n is the period.

Using present value tables for an annuity of 1, we find that the present value of the expected net cash inflows over 5 years is:
PV = 300,000 / 3.433 + 300,000 / 4.111 + 300,000 / 4.930 + 300,000 / 5.882 + (300,000 + 55,000) / 6.881
= 87,444 + 72,951 + 60,744 + 51,089 + 46,342
= 318,570

The initial investment is 525,000, so the IRR is the rate that makes the present value of the expected net cash inflows equal to 525,000. Using trial and error, we find that the IRR is approximately 18.13%, which is higher than the required rate of return of 14%. Therefore, the best choice is B, as the IRR is higher than the required rate of return and the investment is expected to generate a positive return.

(Present Value Tables Are Needed Moreno Corporation's Required Rate of Return Is 14