Question

Laws Corporation is considering the purchase of a machine costing $16,000. Estimated cash savings from using the new machine are $4,120 per year. The machine will have no salvage value at the end of its useful life of six years and the required rate of return for Laws Corporation is 12%. The machine's internal rate of return is closest to (Ignore income taxes.):

Answer 1

Answer:

We can say the rate is close enought to 14%

Explanation:

tthe IRR will be the rate at wich the NPV is zero

The cash flow are an annuity of 4,120 for 6 years

NPV = present value of cash flow - investment

 0    =  PV of annuity - investment

 0  = PV of annuity - 16,000

PV = 16,000

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C    4120

time  6

rate       IRR

$4120 \times \frac{1-(1+IRR)^{-6} }{IRR} = 16,000$

We divide the PV by the annuity to get the annuity factor

16,000 / 4,120 = 3,88349

We can look into the annuity table for a factor at time = 6 close to this figure

we have

14% factor of 3.889

15% factor of 3.784

We can say the rate is close enought to 14%