eBook

Problem 22-13

A firm, whose cost of capital is 12 percent, may acquire equipment for $107,092 and rent it to someone for a period of five years.

1. If the firm charges $26,820 annually to rent the equipment, what are the net present value and the internal rate of return on the investment? Use Appendix D to answer the questions. Use a minus sign to enter negative values, if any. Round your answers for the net present value to the nearest dollar and for the internal rate of return to the nearest whole number.

   NPV: $

   IRR: %

   Should the firm acquire the equipment?

   The firm -Select-shouldshould notItem 3 acquire the equipment as the net present value is -Select-positivenegativeItem 4 , and the internal rate of return -Select-exceedsis lower thanItem 5 the firm's cost of capital.

2. If the equipment has no estimated residual value, what must be the minimum annual rental charge for the firm to earn the required 12 percent on the investment? Use Appendix D to answer the question. Round your answer to the nearest dollar.

   $

3. If the firm can sell the equipment at the end of year five for $8,700 and receive annual rent payments of $26,820, what are the net present value and the internal rate of return on the investment? Use Appendix B and Appendix D to answer the questions. Use a minus sign to enter negative values, if any. Round your answers for the net present value to the nearest dollar and for the internal rate of return to the nearest whole number.

   NPV: $

   IRR: %

   What is the impact of the residual?

   The residual value -Select-increasesdecreasesItem 9 both the NPV and IRR.

4. If the $8,700 residual resulted in the firm charging only $25,080 for the rental payments, what is the impact on the investments net present value? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

   Reducing the rental payments and recouping it through the residual value -Select-reducesincreasesItem 10 the net present value by $ .

appendix d

appendix b