Figure 13-6
JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent.
-Refer to Figure 13-6. JD's approximate internal rate of return of the project is

Question

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 = -£400,000 + £125,000/(1.12^1) + £125,000/(1.12^2) + £125,000/(1.12^3) + £125,000/(1.12^4) + £125,000/(1.12^5) = £0Solving for the IRR using a financial calculator gives an IRR of approximately 17%.

Figure 13-6 JD, Inc., Is Considering the Purchase of Production Equipment That