The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? $$\begin{array} { | l | l | l | l | }
\hline & \text { Machine A } & \text { Machine B } & \text { Machine C } \
\hline \text { Annual net cash flows } & \$ 50,000 & \$ 40,000 & \$ 75,000 \
\hline \text { Average investment } & \$ 250,000 & \$ 300,000 & \$ 500,000 \
\hline
\end{array}$$

Question

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? $$\begin{array} { | l | l | l | l | } 
\hline & \text { Machine A } & \text { Machine B } & \text { Machine C } \
\hline \text { Annual net cash flows } & \$ 50,000 & \$ 40,000 & \$ 75,000 \
\hline \text { Average investment } & \$ 250,000 & \$ 300,000 & \$ 500,000 \
\hline
\end{array}$$

Quizplus · Accepted Answer

Machine A has the highest internal rate of return (IRR) because it has the highest ratio of annual net cash flows to average investment.

The Production Department Is Proposing the Purchase of an Automatic