Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $432,576. The annual cost savings if the new machine is acquired will be $120,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park Department is assuming no tax consequences. What is the internal rate of return for Upper Darby Park Department?

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 the investment equal to zero. By calculating the IRR for the given cash flows ($120,000 annually for 5 years with an initial investment of $432,576), the IRR is approximately 12%.

Upper Darby Park Department Is Considering a New Capital Investment