Brandon Company Is Contemplating the Purchase of a New Piece

question 75

Multiple Choice

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000.Brandon is in the 30% income tax bracket.Predicted annual after-tax cash inflows from this investment are $18,000,$15,000,$9,000,$6,000 and $3,000 for years 1 through 5 respectively.The firm uses straight-line depreciation with no residual value at the end of five years.The hurdle rate for accepting new capital investment projects is 4%,after-tax.(Note: To answer this question,students will have to be provided with the Tables provided in Appendix C,Chapter 12.Alternatively,the instructor can provide students with the following PV factors for 4%: for 1 year = 0.962,for year 2 = 0.925,for year 3 = 0.889,for year 4 = 0.855,for year 5 = 0.822;the PV annuity factor for 4%,5 years = 4.452. )
The estimated internal rate of return (IRR) on this investment is:

• A)Less than 4%.
• B)4%.
• C)Slightly above 4%.
• D)Greater than 6%.
• E)Undeterminable with only the given information.

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