(Ignore income taxes in this problem.) Tidwell Corporation is considering the purchase of a machine costing $18,000. Tidwell estimates that this machine will save $5,000 per year in cash operating expenses for the next five years. If the machine has no salvage value at the end of five years and the discount rate used by Tidwell is 8%, then the machine's internal rate of return is closest to:

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate at which the present value of cash inflows equals the initial cost of the investment. In this case, the initial cost is $18,000, and the cash inflows are $5,000 per year for five years.

Using a financial calculator or Excel, we can input the following cash flows:

Year 0: -$18,000
Year 1-5: $5,000

Using these inputs and solving for the IRR, we get a rate of approximately 12%, which is closest to answer choice C. Therefore, C is the best choice.

(Ignore Income Taxes in This Problem