Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.) : Useful life 7 years Yearly net cash inflow $ 90,000 Salvage value $ 0 Internal rate of return 11 % Required rate of return 7 % Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor (s) using the tables provided. The initial cost of the equipment is closest to: Multiple Choice $540,100 $424,080

The initial cost of the equipment is closest to $424,080

Explanation:

Using the given information in the question, the evaluation of the question is thus,

Useful life of the investment = 7 years.

Yearly net cash inflow = $90,000.

Salvage value = $0

Internal rate of return = 11%.

Required rate of return = 7%.

During the analysis, a Present Value Factor Table will be used.

For each of the years, the net cash inflow is $90,000 and using the Present Value Factor table, we can determine the net present value. With the internal rate of return set at 11%, our present value for year 1 is $81,081 with its present value factor being 0.9009.

For year two, the present value is $73,044 with our present value factor being 0.8116

For year three, the present value is $65,808 with our present value factor being 0.7312.

For year four, the present value is $59,283 with our present value factor being 0.6587.

For year five, the present value is $53,415 with our present value factor being 0.5935.

For year six, the present value is $48,114 with our present value factor being 0.5346.

For year seven, the present value is $43,353 with our present value factor being 0.4817.

When all the present values are added, the sum is $424,098 which is closest to $424,080.