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If the internal rate of return is lower than the minimum required rate of return...

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Accounting

If the internal rate of return is lower than the minimum required rate of return used to compute the net present value of a proposed machine purchase, then the net present value will be:

a. positive. c. zero.

b. negative. d. unknown.

Jacobs Co. is considering buying several small tools at a cost of $15,000. The new tools will save the company $5,000 in manufacturing costs each year and are expected to last 4 years. Assume salvage is $0 and the tax rate is 34%. Jacobs Co. uses MACRS to compute depreciation for income tax purposes. The MACRS depreciation rates are: 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4. Using a minimum desired after-tax rate of return of 10%, Jacobs should: (include the effects of taxes)

a. $213.48 b. ($265.79) c. ($296.00) d. $385.69

11. Refer to #10 above. Assume salvage is $2,000 and that Jacobs uses the straight-line method to compute depreciation for tax purposes. Small tools have a tax depreciation class life of three years. Using a minimum desired after-tax rate of return of 8%, Jacobs should: (include the effects of taxes)

a. ($739.82) b. $896.43 c. ($262.67) d. $1,118.35

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