Asked by Kennedy Willens on Apr 30, 2024
Verified
(Ignore income taxes in this problem.) Welch Corporation is planning an investment with the following characteristics: 
The initial cost of the equipment is closest to:
A) $157,410
B) $175,005
C) $235,890
D) Cannot be determined from the given information.
Initial Cost
The upfront expenditure involved in the purchase of an asset or the start of a project.
Capital Budgeting
The process by which a business evaluates and plans for significant investments in projects or assets.
- Become familiar with the notion and numerical estimation of Net Present Value (NPV), along with its relevance in making decisions regarding capital budgeting.
- Acknowledge the impact of cash inflows and cash outflows on determining the sustainability of a project.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
A
Explanation :
The internal rate of return is the rate of return at which the net present value of the project is zero.
Net present value = -Investment required + (Net annual cash inflow × Present value factor of an annuity for 6 years at 18%)
$0 = -Investment required + ($45,000 × 3.498)
Investment required = $45,000 × 3.498 = $157,410
Net present value = -Investment required + (Net annual cash inflow × Present value factor of an annuity for 6 years at 18%)
$0 = -Investment required + ($45,000 × 3.498)
Investment required = $45,000 × 3.498 = $157,410
Learning Objectives
- Become familiar with the notion and numerical estimation of Net Present Value (NPV), along with its relevance in making decisions regarding capital budgeting.
- Acknowledge the impact of cash inflows and cash outflows on determining the sustainability of a project.