Courtmaster provides superturf for tennis courts. The company has recently investigated investing in a new machine, which will speed up the laying of the superturf. The old machine has a remaining life of 5 years, and the new equipment has a value of $150,000 with a five-year life. The expected additional cash inflows are $35,000 per year. In what range is the internal rate of return for the new machine?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. In this case, the NPV of the new machine is:NPV = -150,000 + 35,000 * (1 - 1 / (1 + IRR)^5) / IRRSetting NPV = 0 and solving for IRR gives:IRR = 5.5%Therefore, the IRR is in the range of 4 - 6%.

Courtmaster Provides Superturf for Tennis Courts