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,the firm will make the investment

Question

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The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of the investment zero. Here, the IRR is 10% because $1,000 per year forever is a perpetuity, and the IRR is calculated as $1,000/$10,000 = 0.10 or 10%. The firm should invest if the interest rate is less than the IRR, which is 10%.

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