Question

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Question 1 A company purchases a piece of manufacturing equipment for rental purposes. The expected annual income is $7,100. Its useful life is four (4) years. Expenses are estimated to be $1,600 annually. If the purchase price is $20,000, what is the prospective rate of return of this investment alternative if is going to last 4 years?

a. IRR = 4.08% b. IRR = 6.08% c. IRR = 5.08% d. IRR = 3.08%

Answer 1

Option (a).

Annual net cash flow ($) = Annual income - Annual expense = 7,100 - 1,600 = 5,500

Rate of Return (ROR) is computed using Excel IRR function as follows.

Year	Net Cash Flow ($)
0	-20,000
1	5,500
2	5,500
3	5,500
4	5,500
ROR =	4%

Formula screenshot:

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