The Picture Company is considering the purchase of a new machine for $68,754. The machine would generate an annual cash flow of $21,000 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12%. The company uses straight-line depreciation. What is the internal rate of return for the 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 is:NPV = -68,754 + 21,000/(1.12^1) + 21,000/(1.12^2) + 21,000/(1.12^3) + 21,000/(1.12^4) + 21,000/(1.12^5) = 0Solving for the IRR, we get:IRR = 16%

The Picture Company Is Considering the Purchase of a New