Jones Company Is Considering the Purchase of a New Machine

question 60

Multiple Choice

Jones Company is considering the purchase of a new machine for $57,000.The machine would generate an annual cash flow of $17,411 for five years.At the end of five years,the machine would have no salvage value.The company's cost of capital is 12 percent.The company uses straight-line depreciation. What is the internal rate of return for the machine rounded to the nearest percent?

• A)12%
• B)18%
• C)14%
• D)16%

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Definitions:

Financial Risk

The possibility of losing money on an investment or business venture, including the risk of not receiving expected returns.

Financial Distress Costs

Expenses stemming from a company's financial troubles, including the costs of bankruptcy, restructuring, and impaired ability to conduct business.

Indirect Bankruptcy Costs

Indirect bankruptcy costs include the intangible costs related to the loss of business, customer trust, and employee morale that a company faces when going through bankruptcy.

M&M Proposition II

It refers to a theory related to capital structure, stating that a firm's cost of equity increases with leverage because the risk to equity holders increases.