Part 5:

Required information

Excel Analytics 14-1 (Algo) Internal Rate of Return [LO14-2, LO14-3]

Stauffer Company has an opportunity to manufacture and sell a new product for a five-year period. The company estimated the following costs and revenues for the new product:

Cost of new equipment	$	420,000
Initial working capital required	$	120,000
Overhaul of the equipment after three years	$	50,000
Salvage value of the equipment after five years	$	30,000

Annual revenues and costs:

Sales	$	850,000
Variable expenses	$	500,000
Fixed out-of-pocket operating costs	$	194,000

When the project concludes in five years the working capital will be released for investment elsewhere in the company.

Excel Analytics 14-1 (Algo) Part 1

Required:

1. One method for computing the internal rate of return relies on computing the factor of the internal rate of return as shown below:

Factor of the internal rate of return	=	Investment required
Annual net cash inflow

Can this equation be used to calculate the internal rate of return for Stauffer Company? Why?

Req 1A Req 1B Which of the following statements is true with respect to this equation? Olt can be used to calculate the internal rate of return in this instance because the net cash inflows are the same every year. OIt cannot be used to calculate the internal rate of return in this instance because the net cash inflows are not the same every year. Req 1A Req 1B 1b. If this equation cannot be used to calculate the internal rate of return explain why. Because the net cash inflows are the same every year. Because the net cash inflows are not the same every year.