Katia is considering whether to buy a new piece of equipment for her firm. She has the following information about the potential investment in capital: interest rate = 5%; inflation rate = 2%; savings rate = 3%; internal rate of return (IRR) = 4%. Katia _____ make the investment because:

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is a measure of an investment's rate of return. If the IRR is below the interest rate, it means the investment is not as profitable as simply putting the money in an interest-bearing account. Therefore, Katia should not make the investment because the IRR (4%) is lower than the interest rate (5%).

Katia Is Considering Whether to Buy a New Piece of Equipment