A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years
-What is the IRR for this investment?
A)11.18 percent.
B)12.98 percent.
C)15.24 percent.
D)12.00 percent.
E)18.00 percent.

Question

Quizplus · Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that makes the net present value (NPV) of the cash flows from an investment equal to zero. For this investment, the IRR is calculated by solving the equation: $0 = -$40 million + $12 million/(1+IRR) + $12 million/(1+IRR)^2 + $12 million/(1+IRR)^3 + $12 million/(1+IRR)^4 + $12 million/(1+IRR)^5. Solving this equation gives an IRR of approximately 15.24 percent.

A New Computer System Is Expected to Cost $40 Million