Brown Corporation recently purchased a new machine for $339,013.20. The new equipment has a useful life of 10 years. Net cash flows will be $60,000 per year, end of year payments. What is the internal rate of return?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the IRR can be found by setting the NPV equation to zero and solving for the discount rate. Given the information, the IRR is closest to 12 percent, as it is the rate at which the present value of the cash inflows ($60,000 annually for 10 years) equals the initial investment ($339,013.20). Calculating the exact IRR requires either trial and error with different rates or using financial calculators or software, but among the given options, 12 percent is the rate that would most closely achieve an NPV of zero.

Brown Corporation Recently Purchased a New Machine for $339,013