Nullabor Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $144 192.The annual cost savings if the new machine is acquired will be $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be zero.What is the internal rate of return for Nullabor Park Department? Ignore taxes.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, we are looking for the rate at which the present value of the annual cost savings of $40,000 over 5 years equals the initial investment of $144,192, with a terminal disposal value of zero. Without performing the exact calculation (which involves solving a polynomial equation or using financial calculator or software), we can estimate or directly calculate that the IRR is approximately 12%. This is because the IRR is the rate that equates the investment outlay with the present value of the inflow, and given the information, 12% is the rate that would typically bring the present value of $40,000 annual savings over 5 years close to the initial investment of $144,192.

Nullabor Park Department Is Considering a New Capital Investment