Baber Corporation is planning an investment with the following characteristics: (Ignore income taxes in this problem

Accounting May 06, 2021

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

Expert Solution

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

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