Jones Company is considering the purchase of a new machine for $57,000. The machine would generate an annual cash flow of $17,411 for 5 years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12%. The company uses straight-line depreciation. What is the internal rate of return for the machine rounded to the nearest percent?

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate at which the present value of the expected cash flows equals the initial cost of the investment.

First, we need to calculate the annual depreciation expense:
Depreciation expense = (Cost of the machine - Salvage value) / Useful life
Depreciation expense = ($57,000 - $0) / 5 = $11,400

Next, we can calculate the annual cash flows after depreciation:
Cash flow = (Annual cash flow + Depreciation expense)
Cash flow = ($17,411 + $11,400) = $28,811

Using this information, we can calculate the present value of the cash flows using a financial calculator or Excel. Using Excel's IRR function, we can find that the IRR is approximately 16%. Therefore, the best choice is D.

Jones Company Is Considering the Purchase of a New Machine