Burgess Corporation is considering purchasing equipment that costs $235,000. The equipment has an estimated useful life of 5 years and no salvage value. Burgess believes that the annual cash inflows from using the equipment will be $65,000. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:1) Calculate the net present value of the equipment assuming that Burgess's cost of capital is 12%. Is the equipment an acceptable investment? 2) Calculate the net present value of the equipment assuming that Burgess's cost of capital is 10%. Is the equipment an acceptable investment? 3) Based on your results to parts 1) and 2), estimate the internal rate of return for the investment in the equipment.
What will be an ideal response?
1) Net present value = ($65,000 × 3.604776) ? $235,000 = $(690). Because net present value is negative, the equipment is not an acceptable investment at a required rate of return of 12%.
2) Net present value = ($65,000 × 3.790787) ? $235,000 = $11,401. Because net present value is positive, the equipment is an acceptable investment at a required rate of return of 10%.
3) The internal rate of return must be between 10% and 12%. Based on parts 1) and 2), internal rate of return appears to be somewhat below 12%.
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