Gallatin Co

question 54

Multiple Choice

Gallatin Co. is considering the purchase of a new machine that costs $300,000. It is anticipated that it will provide net annual cash inflows of $80,000. The machine has an expected life of 5 years with no salvage value. Gallatin's hurdle rate is 7%. The present value annuity factors for 5 years are 4.1002 at 7%, 3.9927 at 8%, 3.8897 at 9%, 3.7908 at 10%, and 3.6048 at 12%. The internal rate of return for the purchase is:

• A) Between 10% and 12%
• B) Between 9% and 10%
• C) Between 8% and 9%
• D) Between 7% and 8%

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Definitions:

Financial Analysis

The evaluation of a company's financial statements to determine its performance and make future predictions, often involving ratio and trend analysis.

Return

The gain or loss generated on an investment over a particular period, expressed as a percentage of the investment’s initial cost.

Internal Rate

An internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.

Independent Project

A project undertaken by an entity or individual that operates independently of other concurrent initiatives, not impacting or influenced by them.