The mayor of Smalltown, Western Australia, is considering the purchase of a computer system to automate the city's rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased.
If Smalltown uses a 10 per cent discount rate for capital budgeting decisions, what can be said about the internal rate of return (IRR) if the net present value at 12 per cent is positive?

Question

The mayor of Smalltown, Western Australia, is considering the purchase of a computer system to automate the city's rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased. 
If Smalltown uses a 10 per cent discount rate for capital budgeting decisions, what can be said about the internal rate of return (IRR) if the net present value at 12 per cent is positive?

Quizplus · Accepted Answer

If the net present value at 12% is positive, then the internal rate of return (IRR) must be greater than 12% since the IRR is the discount rate that makes the net present value equal to zero. Therefore, the best choice is A.

The Mayor of Smalltown, Western Australia, Is Considering the Purchase