Maxcy Limos, Inc., is considering the purchase of a limousine that would cost $187,335, would have a useful life of 9 years, and would have no salvage value. The limousine would bring in cash inflows of $45,000 per year in excess of its cash operating costs. (Ignore income taxes.)See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the internal rate of return on the investment in the new limousine.
What will be an ideal response?
Factor of the internal rate of return = Investment required ÷ Annual net cash inflow
= $187,335 ÷ $45,000 = 4.163
The factor of 4.163 for 9 years represents an internal rate of return of 19%.
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