Glassworks Inc. is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to: Present Value of $1
Present Value of Annuity of $1

Question

Glassworks Inc. is considering the purchase of a special blow-molding machine that would cost $59,752 and would have a useful life of 8 years. The machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its life. The internal rate of return on the machine would be closest to: Present Value of $1
 Present Value of Annuity of $1

Quizplus · Accepted Answer

To find the internal rate of return (IRR), we need to find the discount rate that equates the present value of cash inflows to the initial cost of the machine. Using a financial calculator, we can input the following:

N = 8 (number of years)
I/Y = ? (IRR we're trying to find)
PV = -59752 (initial cost)
PMT = 11200 (net annual cash inflows)

Solving for I/Y, we get an answer of approximately 10.1%, which is closest to choice B, 10%. Therefore, the best choice is B as the IRR is slightly greater than 10%.