Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710.
-Using the above information for Lopez,the actual rate of return that the project earns is

Question

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to generate cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. 
-Using the above information for Lopez,the actual rate of return that the project earns is

Quizplus · Accepted Answer

To calculate the actual rate of return, we need to use the net present value (NPV) formula, which subtracts the initial cost of the project from the present value of its expected cash inflows:

NPV = (PV of cash inflows) - (initial cost)

PV of cash inflows = $60,000 x 6.710 = $402,600
Initial cost = $400,000

NPV = $402,600 - $400,000 = $2,600

Since the NPV is positive, the project is expected to earn a rate of return greater than the company's minimum rate of return of 8 percent. Therefore, the answer is B.

Lopez CoIs Interested in Purchasing Equipment That Would Improve Its Operational