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Homework answers / question archive / Baber Corporation is planning an investment with the following characteristics: (Ignore income taxes in this problem
Baber Corporation is planning an investment with the following characteristics: (Ignore income taxes in this problem.)
Useful life 7 years
Yearly net cash inflow $60,000
Salvage value $0
Internal rate of return 14%
Required rate of return 10%
Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
The initial cost of the equipment is closest to: (Round discount factor(s) to 3 decimal places)
Multiple Choice :
a) $360,100
b) $257,280
c) $267,630
d) Cannot be determined
Computation of the initial cost of equipment:-
Initial cost = Annual cash flows*((1-1/(1+rate)^n)/rate)
= $60,000*((1-1/(1+14%)^7)/14%)
= $60,000*4.288
= $257,280
Hence, the correct option is b) $257,280
