Assignment Problem: The owner of ABC Company is evaluating whether or not to purchase equipment for a total of $2,000,000. The company has an 11% required return on its investments. The company's owner would like to recoup the cost of the investment within 4 years. The expected cash inflows each year due to the purchase of equipment is as follows:
|
Year
|
Cash Flow
|
|
1
|
$500,000
|
|
2
|
475,000
|
|
3
|
450,000
|
|
4
|
425,000
|
|
5
|
400,000
|
|
6
|
275,000
|
|
7
|
185,000
|
Required: Compute the payback period, internal rate of return, modified internal rate of return, and net present value. Comment on whether or not the company should purchase the equipment based on your analysis.
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