Diamond Manufacturing Company provides glassware machines 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 four years and the new equipment has a value of $87,776 with a four-year life.The expected additional cash inflows are $32,000 per year.What is the internal rate of return?

Question

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the discount rate at which the net present value of the cash inflows equals the initial cost of the new equipment. Using a financial calculator or a spreadsheet, we find that the internal rate of return is approximately 17%. This is higher than the company's cost of capital, so accepting the new equipment would be a profitable investment. Therefore, the best choice is C, to invest in the new equipment.

Diamond Manufacturing Company Provides Glassware Machines for Major Department Store