Question

Acme Company is considering investing in a new machine that costs $126,594 and that has a useful life of 12 years with no salvage value. The machine will generate $19,500 annually in net cash inflows. The internal rate of return on the investment is: (Round your intermediate calculations to 3-decimals and your internal rate of return calculations to the nearest whole percent.)

Answer 1

Answer: 11%

Explanation:

The internal rate of return is the rate that will equate the cash inflows with the cost of investment.

It is therefore the discount rate used to find the present value of an annuity because the inflows are stable and are therefore annuities.

Present value of annuity = Annuity * Present value factor of annuity, 12 years, %?

126,594 = 19,500 * Present value of annuity factor

Present value of annuity factor = 126,594 / 19,500

= 6.492

Go to a present value of annuity factor table and find the interest rate that intersects with 12 years to give a factor of 6.492:

Rate is 11%