Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of three years and the new equipment has a value of $52,650 with a three-year life. The expected additional cash inflows are $25,000 per year. What is the internal rate of return?
A)20%
B)16%
C)10%
D)8%

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the cash flows from an investment equal to zero. In this case, the IRR is the rate that equates the present value of the expected additional cash inflows ($25,000 per year for three years) to the cost of the new equipment ($52,650). Using financial calculations or software, the IRR is found to be approximately 20%.

Soda Manufacturing Company Provides Vending Machines for Soft-Drink Manufacturers