The Zeron Corporation recently purchased a new machine for its factory operations at a cost of $921,250. The investment is expected to generate $250,000 in annual cash flows for a period of six years. The required rate of return is 14%. The old machine has a remaining life of six years. The new machine is expected to have zero value at the end of the six-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return?
A)15%
B)16%
C)17%
D)18%

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that will make the present value of the expected cash flows equal to the cost of the investment. We can use a financial calculator or Excel to solve for IRR.

Using Excel, we can set up the following formula:

=IRR({-921250, 250000, 250000, 250000, 250000, 250000, 250000})

This represents the initial cost of the investment (-$921,250) and the expected annual cash flows for 6 years ($250,000 for each year).

Solving this formula gives us an IRR of 16%.

Since the required rate of return is 14%, the IRR of 16% is greater and thus the investment is expected to be profitable. Therefore, the best choice is B, with an explanation that the IRR is greater than the required rate of return, indicating that the investment is expected to be profitable.

The Zeron Corporation Recently Purchased a New Machine for Its