Asked by ashish adhikari on Jul 01, 2024
Verified
Maxcy Limos, Incorporated, 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.)Click here to view Exhibit 14B-1 and Exhibit 14B-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.
Internal Rate of Return
A financial metric used to estimate the profitability of potential investments, calculated as the rate at which the net present value of costs equals the net present value of benefits.
Discount Factor
A multiplier used to determine the present value of a future cash flow, reflecting the time value of money.
Cash Inflows
The total amount of money coming into a business from various sources, such as sales, investments, and financing activities.
- Understand and apply the concept of internal rate of return (IRR) for investment decision-making.
Verified Answer
QG
Quneshial GivensJul 02, 2024
Final Answer :
Factor of the internal rate of return = Investment required ÷ Annual net cash inflow= $187,335 ÷ $45,000 = 4.163The factor of 4.163 for 9 years represents an internal rate of return of 19%.
Learning Objectives
- Understand and apply the concept of internal rate of return (IRR) for investment decision-making.