A firm, whose cost of capital is 10 percent, may acquire equipment for $113,479 and rent it

Question:

A firm, whose cost of capital is 10 percent, may acquire equipment for $113,479 and rent it to someone for a period of five years.

a. If the firm charges $36,290 annually to rent the equipment, what are the net present value and the internal rate of return on the investment? Should the firm acquire the equipment?

b. If the equipment has no estimated residual value, what must be the minimum annual rental charge for the firm to earn the required 10 percent on the investment?

c. If the firm can sell the equipment at the end of the fifth year for $10,000 and receive annual rent payments of $36,290, what are the net present value and the internal rate of return on the investment?

What is the impact of the residual?

d. If the $10,000 residual resulted in the firm charging only $34,290 for the rental payments, what is the impact on the investment’s net present value?

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