Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,will the firm make the investment?
A) definitely
B) definitely not
C) if the interest rate exceeds 10%
D) if the interest rate is less than 10%

Question

Quizplus · Accepted Answer

The Internal Rate of Return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. In this case, the IRR is 10% because the device generates a perpetual annual savings of $1,000 for a one-time cost of $10,000. Therefore, the firm will make the investment if the interest rate is less than 10%, as the return on the investment exceeds the cost of capital.

Suppose a New Cost-Saving Device Will Forever Generate $1,000 Net