Sue Falls is the president of Sports,Inc.She is considering buying a new machine that would cost $14,125.Sue has determined that the new machine promises an internal rate of return of 12%,but Sue has misplaced the paper that gives the annual cost savings promised by the new machine.She does remember that the machine has a projected life of ten years.Based on these data,what are the annual cost savings? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

The annual cost savings can be determined by using the internal rate of return (IRR) and the initial cost of the machine. The IRR is the rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero. Given the IRR of 12%, the initial investment of $14,125, and the machine's life of 10 years, we can calculate the annual cost savings that would yield this IRR. The correct answer involves calculating the annuity payment for a present value of $14,125, an interest rate of 12%, and a period of 10 years, which results in annual cost savings of approximately $2,500.

Sue Falls Is the President of Sports,Inc