Brandon Company is contemplating the purchase of a new piece of equipment for $42,000. Brandon is in the 20% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $13,000, $7,000, $7,000 and $4,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the after-tax hurdle rate for accepting new capital investment projects by the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) The estimated internal rate of return (IRR) on this investment is:

Multiple Choice

• 4%.

• Less than 4%.

• Undeterminable with only the given information.

• Slightly above 4%.

• Greater than 6%.