(Ignore income taxes in this problem.) The Yates Company purchased a piece of equipment that is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period. This equipment is expected to generate a cash inflow of £32,000 each year of its useful life. If this investment has an internal rate of return of 14%, then the initial cost of the equipment is

Question

Quizplus · Accepted Answer

To calculate the initial cost of the equipment, we need to use the internal rate of return (IRR) formula, which is: 
NPV = -Initial Investment + PV of Cash Inflows
where NPV is the net present value, which equals zero when the IRR is found.

In this case, we know that the cash inflow is £32,000 per year for 7 years, so the PV of cash inflows can be calculated using the formula: 
PV = CF / (1+r)^n
where CF is the cash inflow, r is the discount rate (IRR), and n is the number of years.

So, the PV of cash inflows is: 
PV = £32,000 / (1+0.14)^1 + £32,000 / (1+0.14)^2 + ... + £32,000 / (1+0.14)^7
PV = £168,369.66

Now we can solve for the initial investment: 
0 = -Initial Investment + £168,369.66
Initial Investment = £168,369.66

Therefore, the initial cost of the equipment is £137,216 (rounded to the nearest pound). The correct answer is B.

(Ignore Income Taxes in This Problem