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 1 year and no sales value. The new equipment has a value of $52,650 with a three-year life. The expected additional cash inflows are $25,000 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 cash outflow is $52,650 (the cost of the new equipment), and the cash inflows are $25,000 per year for three years. The IRR that equates the present value of these inflows to the initial investment is 20 percent.

Soda Manufacturing Company Provides Vending Machines for Soft Drink Manufacturers