Gulf Coast Parks Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $432,576. The annual cost savings if the new machine is acquired will be $120,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Gulf Coast Parks Department is assuming no tax consequences. What is the internal rate of return for Gulf Coast Parks Department?

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 can be found by setting the NPV equation to zero and solving for the discount rate. Given the initial investment of $432,576 and annual savings of $120,000 over 5 years with no terminal value, the IRR is approximately 12%. This can be calculated using financial calculators or software designed for IRR calculations, as the equation involves solving for the rate in a polynomial equation, which is not straightforward algebraically.

Gulf Coast Parks Department Is Considering a New Capital Investment