(Ignore income taxes in this problem.) Henscheid Roofing is considering the purchase of a crane that would cost $104,972, would have a useful life of 7 years, and would have no salvage value. The use of the crane would result in labor savings of $23,000 per year. The internal rate of return on the investment in the crane is closest to:

Question

Quizplus · Accepted Answer

To find the internal rate of return (IRR) on this investment, we need to calculate the present value of the cash inflows and outflows associated with the crane purchase.

The initial investment of $104,972 represents a cash outflow. The annual labor savings of $23,000 represents a cash inflow. We'll use a discount rate that represents our required rate of return on this investment.

Using a financial calculator or spreadsheet, we can solve for the discount rate that makes the net present value of this investment equal to zero. Doing so gives us an IRR of approximately 12%.

Since this IRR is greater than the company's required rate of return, the crane investment appears to be a worthwhile one. Therefore, the best choice is option C), 12%.

(Ignore Income Taxes in This Problem