Question

Renfroe Corporation is considering the purchase of a machine that would cost $22,712 and would have a useful life of 5 years. The machine would generate $6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of return on the machine would be closest to: A) 12%. B) 14%. C) 8%. D) 10%.

Answer 1

Answer:

option (A) 12%

Explanation:

Data provided :

Purchasing cost of the machine = $ 22,712

Useful life of the machine = 5 years

Net annual cash inflow generated per year = $ 6,300

Now,

at for the value for internal rate of return,

the present value of inflow = Present value of the outflow for the 5 years

let the internal rate of return be r%

thus,

$ 22,712 = $\frac{6,300}{1.0r^1}+\frac{6,300}{1.0r^2}+\frac{6,300}{1.0r^3}+\frac{6,300}{1.0r^4}+\frac{6,300}{1.0r^5}$

on solving the above relation, we get

r ≈ 12%

Hence, option A is correct