Mercury Ltd. is considering purchasing laser equipment for $72,000. The machine will require ...

a.
   Predicted   Year or   PV   PV of
   cash flows   years   factor   cash flows
Initial investment   $(80,000)   0   1.000   $(80,000)
Annual operations, net   17,000   1-7   4.564   77,588
Salvage value, work cap.   17,760   7   0.452    8,028
Net present value            $5,616

b.   
Trial and error or use calculator. You know it is above 12 percent because the answer to Part A was positive and therefore greater than the discount rate. Therefore, let's try 14 percent.

   Predicted   Year or   PV   PV of
   cash flows   years   factor   cash flows
Initial investment   $(80,000)   0   1.000   $(80,000)
Annual operations, net   17,000   1-7   4.288      72,896
Salvage value, work cap.   17,760   7   0.400        7,104
Net present value                  $ -0-

The zero net present value indicates an internal rate of return of exactly 14 percent.