Kenny, manager of Day Laboratory, is investigating the possibility of acquiring some new test equipment. To acquire the equipment requires an initial outlay of $300,000. To raise the capital, Kenny will sell stock valued at $200,000 and borrow $100,000. The loan for $100,000 would carry an interest rate of 6 percent. Kenny figures that the cost of capital is 10%. The cost of capital is the discount rate that will be used for capital investment decision. Kenny estimates that the new test equipment will produce a cash inflow of $50,000 per year. Kenny expects that the equipment to last for 20 years.
a. Compute the payback period.
b. Assuming that depreciation is $14,000 per year, compute the rate of return on totalinvestment.
c. Compute the NPV of the text equipment.
d. Compute the IRR of the test equipment.
e. Should Kenny buy the equipment?

Answer rating: 100% (QA)

a PV 300000 i 10 n 20 Payback period 30000050000 6 years b Rate of return Annual cash inflows ... View the full answer