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chapter 23 quiz - expected to generate annual cash flows...

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Chapter 23 ADO IT! 23-4 Beacon Company is considering purchasing new equipment for $354,100. The equipment has a 5-year useful life, and depreciation would be $70,820 (assuming straight-line depreciation and zero salvage value). The purchase of the equipment should increase net income by $42,250 each year for 5 years Post-Lecture, Question 10 Sarbanes Theater, Inc. is deciding whether to remodel its theater to create additional seating for its patrons. The estimated cost is $110,306 with no salvage value expected and an estimated life of 5 years. Sarbanes' required rate of return is 8%. The machine is
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Unformatted text preview: expected to generate annual cash flows equal to $30,600 and income equal to $6,600 over each of the next five years. How much is the internal rate of return expected on the remodeling? Since IRR is a time value of money approach, use table 2 in Appendix C of the textbook. Divide the cost by the annual cash flows to get the factor: Initial investment ÷ annual cash flows = $110,306/$30,600 = 3.60477, which is the factor that must be located in the present value of an annuity table at n = 5. The factor equates to an interest rate close to 12%....
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