1.
Baber Corporation is planning an investment with the following characteristics: (Ignore income
taxes in this problem.)
The initial cost of the equipment is closest to: (Round discount factor(s) to 3 decimal places)
a. $810100
b. $508500
c. $518850
d. cannot be determined from the given information.
PLEASE SHOW ALL WORK
Useful life 10 years
Yearly net cash inflow $90,000
Salvage value $0
Internal rate of return 12%
Required rate of return 8%
Solution
The initial investment = present value of future cash flows discounted at IRR.
Thus,
Present value
= 90,000 / (1.12) + 90,000 / (1.12) 2
+ . . . . . 90,000 / (1.12) 10
= 90000/1.12 [ 1 - (1.12) -10
/ 1 - (1.12) -1
]
= 508520

2.
Thus, initial Investment = 508500 /-
Option B is correct.
Ask if you have doubts. Thanks