Next Service Centre is considering purchasing a new computer network for $82,000. It will require ...

a.
   Predicted
Cash Flows   Year(s)   PV Factor   PV of Cash Flows
Initial investment   $(95,000)   0   1.000   $(95,000)
Annual operations, net   18,000   1 - 8   4.639   83,502
Salvage value, work cap   14,500   8   0.351     5,090
   Net present value            $(6,408)

b.   Trial and error is necessary. You know it is below 14% because the answer to Part A was negative and, therefore, less than the discount rate. Therefore, let's try 12%.

   Predicted
Cash Flows   Year(s)   PV Factor   PV Of
Cash Flows
Initial investment   $(95,000)   0   1.000   $(95,000)
Annual operations, net   18,000   1 - 8   4.968   89,424
Salvage value, work cap   14,500   8   0.404     5,858
   Net present value                   $  282

The (almost) zero net present value indicates an internal rate of return of approximately 12%.