Sam Eatmon, CFO of Chaiston Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that

Question:

Sam Eatmon, CFO of Chaiston Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $150,000 per year. The equipment costs $448,591.80. It is expected to have a five-year useful life and a zero salvage value. Chaiston’s cost of capital is 18 percent.

Required

a. Calculate the internal rate of return of the investment opportunity.

b. Indicate whether Chaiston should purchase the equipment.

Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...