Question

Blue Spruce, Inc. is considering purchasing equipment costing $72000 with a 6-year useful life. The equipment will provide annual cost savings of $17514 and will be depreciated straight-line over its useful life with no salvage value. Blue Spruce requires a 10% rate of return. Present Value of an Annuity of 1 Period8%9d.6234.4864.3554.2314.1113.784What is the approximate internal rate of return for this investment

Answer 1

The approximate internal rate of return for this investment is $0.054.

What is rate of return?

• The net gain or loss of an investment over a given time period, stated as a percentage of the investment's starting cost, is known as a rate of return (RoR).
• You determine the percentage change from the start of the period to the end when computing the rate of return.
• Any type of investment instrument, including real estate, bonds, equities, and fine art, can be subject to a rate of return (RoR).

Any asset can be used with the RoR as long as it is purchased once and generates cash flow at some point in the future. The attractiveness of various investments can be determined, in part, by comparing their historical rates of return to those of comparable assets.

We have, (Net Annual cash inflow x PV of an Annuity of 1 at 10%) - Initial Investment = Net present value (find closest to zero))

($17,514 x 4.111) = $72000.054 - $72,000 = $0.054 (closest to zero).

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