Sun Company is considering purchasing new equipment costing $350,000. Sun's management has
Estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | }
\hline \text { Year 1 } & \$ 100,000 \
\hline \text { Year 2 } & \$ 100,000 \
\hline \text { Year 3 } & \$ 125,000 \
\hline \text { Year 4 } & \$ 125,000 \
\hline \text { Year 5 } & \$ 75,000 \
\hline
\end{array}$$ If the discount rate is 10%, what is the internal rate of return?

Question

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has
Estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | } 
\hline \text { Year 1 } & \$ 100,000 \
\hline \text { Year 2 } & \$ 100,000 \
\hline \text { Year 3 } & \$ 125,000 \
\hline \text { Year 4 } & \$ 125,000 \
\hline \text { Year 5 } & \$ 75,000 \
\hline
\end{array}$$ If the discount rate is 10%, what is the internal rate of return?

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate at which the net present value (NPV) of an investment equals zero. Given that the cash flows total $525,000 over 5 years, which is more than the initial investment of $350,000, and considering a discount rate of 10% is used for comparison, the IRR must be higher because the investment generates enough return to recover the initial outlay and still provide excess returns. Therefore, if at 10% the investment appears profitable, the IRR, which makes the NPV zero, must be greater than 10%.

Sun Company Is Considering Purchasing New Equipment Costing $350,000 If the Discount Rate Is 10%, What Is the Internal