Home Security Systems is analyzing the purchase of manufacturing equipment that

Question

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $58,000. The annual cash infows for the next three years will be: 29,000 27,000 22,000 Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method. a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) tenal rate of retun b. With a cost of capital of 15 percent, should the equipment be purchased O Yes O No

Explanation / Answer

a.Let irr be x%
At irr,present value of inflows=present value of outflows.

58000=29000/1.0x+27000/1.0x^2+22000/1.0x^3

Hence x=irr=17.27%(Approx).

b.Hence since irr is greater than the cost of capital;purchases must be made.

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