Problem
Melinda Corp buys equipment at a cost of $75,000 and expects that this equipment will be useful for 5 years. The equipment will generate incoming cash flows of $24,000 per year and will have no salvage value at the end of its life. Ignore taxes and assume a 12% required rate of return for this company.
Answer all of the following parts of this question and be sure to show your calculation work:
(a) What is the net present value (NPV) of this investment? Should Melinda Corp buy the equipment based on the NPV you calculated? Why?
(b) What is the internal rate of return (IRR) for this investment?
(c) What is the payback period for this investment?