The senior VP in charge of your area asked you to recommend the purchase of a new, expensive asset for the firm. You assemble a team to help you. Your goal is to find which of the three options is best. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future.

The companys average reported net income is $1,250,000.

The team is considering the following options

Option 1:

The asset cost is $300,000.

The asset is expected to have a 10-year useful life with no salvage value.

Straight-line depreciation is used.

The net cash inflow is expected to be $89,000 each year for 10 years.

The company uses a 12% discount rate in evaluating capital investments.

Option 2:

The asset cost is $575,000.

The machine is expected to have a 10-year useful life with no salvage value.

Straight-line depreciation is used.

The net cash inflow is expected to be $142,000 each year for 10 years.

The company uses a 12% discount rate in evaluating capital investments.

Option 3:

The asset cost is $280,000,

The asset is expected to have a 10-year useful life with no salvage value.

Straight-line depreciation is used.

The net cash inflow is expected to be $62,000 each year for 10 years.

The company uses a 12% discount rate in evaluating capital investments.

Solve for:

Internal rate of return (IRR): A computation of the projects actual expected return on investment.

(step by step)