Home Security Systems is analyzing the purchase of manufacturing equipment that

Question

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $66,000. The annual cash inflows for the next three years will be: Year Cash Flow 1 $ 33,000 2 31,000 3 26,000 Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method. a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal rate of return % b. With a cost of capital of 15 percent, should the equipment be purchased? Yes No

Explanation / Answer

NPV= {Period Cash Flow / (1+R)^T} - Initial Investment

        =    33000      +     31000     +         26000           - 66000

              (1+.15)1              (1+.15)2           (1 + .15)3

      

        = 28695       +    23440      +        17095           - 66000

        = 69230 – 66000

        = 3230

We should purchase the equipment since our NPV is positive.

IRR % = Year Cashflow 0 -66000 1 33000 2 31000 3 26000 IRR % =IRR(H8:H11)

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