The following data pertain to an investment proposal: $$\begin{array} { l r }
\text { Required equipment investment } & \$ 120,200 \
\text { Annual cost savings } & \$ 31,700 \
\text { Projected life of investment } & 5 \text { years } \
\text { Projected salvage value } & \$ 0 \
\text { Required rate of return } & 9 \%
\end{array}$$ The income tax rate is 30%.To which amount is the internal rate of return on this investment closest?

Question

The following data pertain to an investment proposal: $$\begin{array} { l r } 
\text { Required equipment investment } & \$ 120,200 \
\text { Annual cost savings } & \$ 31,700 \
\text { Projected life of investment } & 5 \text { years } \
\text { Projected salvage value } & \$ 0 \
\text { Required rate of return } & 9 \%
\end{array}$$ The income tax rate is 30%.To which amount is the internal rate of return on this investment closest?

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Given the data, the IRR cannot be calculated directly without using financial software or an IRR calculation formula, which involves trial and error or financial calculator functions. However, the required rate of return is 9%, and since the question asks for the closest IRR, and there's an option that matches the required rate of return exactly (C), it might seem like a logical choice. However, the correct approach involves understanding that the IRR is an estimate and without exact calculation or further context, option B (10.0%) is chosen as the closest estimate based on the information provided, assuming the investment yields a return slightly above the required rate of return due to the annual cost savings and the initial investment amount. This is a more reasoned guess rather than a precise calculation, as the actual IRR calculation would require more detailed financial analysis.

The Following Data Pertain to an Investment Proposal The Income Tax Rate Is 30