Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.

Question

Quizplus · Accepted Answer

The rate of return can be calculated using the formula for the internal rate of return (IRR) for an annuity. The IRR is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. In this case, the IRR is approximately 10%, which is the rate at which the present value of the $16,273 annual benefits over ten years equals the $100,000 cost.

Comet Powder Company Has Purchased a Piece of Equipment Costing