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 (rounded to the nearest percent)?

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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 - 1 / (1 + 0.12)^5) / 0.12 = -68,754 + 21,000 * 3.605 = -68,754 + 75,405 = 6,651The IRR is the discount rate that makes the NPV equal to zero. Using a financial calculator, we find that the IRR is 16%.

The Picture Company Is Considering the Purchase of a New