Salvador Corporation Is Considering the Purchase of a Special Blow-Molding

question 179

Multiple Choice

Salvador Corporation is considering the purchase of a special blow-molding machine that would cost $64,366 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to

• A) 8%.
• B) 10%.
• C) 12%.
• D) 14%.

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Definitions:

Call

A Call option is a financial contract that gives the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a specific period.

European Put

A type of option contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price on or before a specific date.

European Call

An option contract giving the holder the right, but not the obligation, to buy a specified asset at a predetermined price on or before a specific expiration date, only exercisable on the expiration date.

Net Profit

The amount of income that remains after subtracting all expenses, taxes, and costs from total revenue.