Gold Coast Glass Company provides glassware for major department store retailers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of five years and the new equipment has a value of $117 320 with a five-year life.The expected additional cash inflows total $35 000 per year.What is the internal rate of return?

Question

Quizplus · Accepted Answer

We can calculate the internal rate of return (IRR) by finding the discount rate that makes the net present value of the cash inflows equal to the initial cost of the new equipment.
Using a financial calculator or spreadsheet, we can input the following values:
- PV = -117,320 (the cost of the new equipment)
- PMT = 35,000 (the annual cash inflows)
- N = 5 (the number of years)
- FV = 0

By solving for the IRR, we get approximately 15%. This means that the new equipment will generate enough cash inflows to provide a return of 15%, which is higher than the company's required rate of return. Therefore, the best choice would be to purchase the new equipment.

Gold Coast Glass Company Provides Glassware for Major Department Store