An entrepreneur would like to buy a piece of equipment for his business. The equipment cost $50,000 and will increase cash flow by $20,000 each year for 5 years. What is his IRR?
A) 28.65%
B) 2.50%
C) 25.55%
D) 40.00%

Question

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. In this case, the IRR of 28.65% is the rate at which the present value of the future cash inflows from the equipment ($20,000 per year for 5 years) equals the initial investment of $50,000. This can be calculated using financial calculators or software designed for IRR calculations, where you input the initial investment as a negative cash flow followed by the annual positive cash flows. The IRR is a commonly used metric to evaluate the profitability of potential investments.

An Entrepreneur Would Like to Buy a Piece of Equipment