A new machine that costs $79,860 is expected to save annual cash operating costs of $20,000 over each of the next five years. The machine's internal rate of return is:

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that makes the net present value (NPV) of all the cash flows equal to zero. In other words, we need to solve for r in the following equation:

NPV = -Initial cost + cash savings/(1+r)^1 + cash savings/(1+r)^2 + ... + cash savings/(1+r)^5 = 0

Substituting the given values, we get:

0 = -79860 + 20000/(1+r)^1 + 20000/(1+r)^2 + 20000/(1+r)^3 + 20000/(1+r)^4 + 20000/(1+r)^5

Using a financial calculator or spreadsheet, we can solve for r to get the IRR:

IRR = 8.16%

Therefore, the answer is C, approximately 8%. This means that the machine's expected return is around 8% per year, which is higher than the company's cost of capital (or hurdle rate). Hence, investing in the machine is financially feasible and beneficial.

A New Machine That Costs $79,860 Is Expected to Save