An engineering firm wants to buy a new equipment that will later be rented to other...
An engineering firm wants to buy a new equipment that will later be rented to other companies. After looking at several quotes, the cheapest option shows an initial cost of $30,000 and benefits of $5,000 on year 1 and $3,000 on year 2. This pattern of cash flows stays consistent until the end of the 7th year when the machine has a value of $0 and is discarded at no additional cost. Compute the rate of return of this investment.
Homework Answers
Rate of return is computed using Excel IRR function as follows.
| Year | Cash Flow ($) |
| 0 | -30,000 |
| 1 | 5,000 |
| 2 | 3,000 |
| 3 | 5,000 |
| 4 | 3,000 |
| 5 | 5,000 |
| 6 | 3,000 |
| 7 | 5,000 |
| Rate of Return = | -0.84% |
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