Wonton Productions bought a piece of equipment for $55,898 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have no salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. What is the internal rate of return?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. In this case, the IRR is approximately 8%, as it is the rate at which the present value of the annual cash flows ($14,000) over 5 years equals the initial investment of $55,898.

Wonton Productions Bought a Piece of Equipment for $55,898 That