Question

The Comil Corporation recently purchased a new machine for its factory operations at a cost of $328,325. The investment is expected to generate $115,000 in annual cash flows for a period of four years. The required rate of return is 13%. The old machine has a remaining life of four years. The new machine is expected to have zero value at the end of the four-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return

Answer 1

Answer: 15%

Explanation:

IRR is the discount rate that makes the NPV equal zero. Required rates of return that are less than the IRR will therefore result in a positive NPV and those that are higher will result in a negative NPV.

Use Excel to find the IRR.

= IRR(-328325,115000,115000,115000,115000)

= 15%

As the required rate of 13% is less than the IRR of 15%, the new machine will have a positive NPV.