George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the approximate internal rate of return?

Question

Quizplus · Accepted Answer

The correct answer is A because the internal rate of return is the discount rate that makes the net present value of a project equal to zero. In this case, the net present value of the project is:NPV = -150,000 + 40,000/(1.10^1) + 40,000/(1.10^2) + 40,000/(1.10^3) + 40,000/(1.10^4) + 40,000/(1.10^5) = 0Solving for the discount rate, we get:10% = 10.43%

George William Buys a Machine for His Business