25. Managers at Titan’s Furniture are considering the purchase of a new computer
ID: 2456537 • Letter: 2
Question
25. Managers at Titan’s Furniture are considering the purchase of a new computer system. The following estimates are available:
Initial outlay $16,000
Annual cost savings from new system $4,100
Estimated life of computer 5 years
Estimated residual life $0
Required:
Determine the internal rate of return for the computer purchase.
Indicate whether the computer purchase should be accepted under each of the following assumptions:
1) The cost of capital is 5.75%?
2) The cost of capital is 6%?
3) The cost of capital is 9.15%
4) The cost of capital is 12%?
Explanation / Answer
Statemnet showing Cash flows Particulars Time PVf@8% Amount PV Cash Outflows - 1.00 (16,000.00) (16,000.00) PV of Cash outflows (16,000.00) Cash inflows 1.00 0.9259 4,100.00 3,796.30 Cash inflows 2.00 0.8573 4,100.00 3,515.09 Cash inflows 3.00 0.7938 4,100.00 3,254.71 Cash inflows 4.00 0.7350 4,100.00 3,013.62 Cash inflows 5.00 0.6806 4,100.00 2,790.39 PV of Cash Inflows 16,370.11 NPV 370.11 Statemnet showing Cash flows Particulars Time PVf@9% Amount PV Cash Outflows - 1.00 (16,000.00) (16,000.00) PV of Cash outflows (16,000.00) Cash inflows 1.00 0.9174 4,100.00 3,761.47 Cash inflows 2.00 0.8417 4,100.00 3,450.89 Cash inflows 3.00 0.7722 4,100.00 3,165.95 Cash inflows 4.00 0.7084 4,100.00 2,904.54 Cash inflows 5.00 0.6499 4,100.00 2,664.72 PV of Cash Inflows 15,947.57 NPV (52.43) NPV @8% 370.11 NPV @9% (52.43) Diff @1% 422.54 IRR = 8% + 1%*370.11/422.54 IRR = 8.88% 1) The cost of capital is 5.75% Yes , Since IRR is higher than cost of capital 2) The cost of capital is 6%? Yes , Since IRR is higher than cost of capital 3) The cost of capital is 9.15% No , Since IRR is lower than cost of capital 4) The cost of capital is 12%? No , Since IRR is lower than cost of capital
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.