Question

A company is considering investing in a new machine that requires a cash payment of $38,198 today. The machine will generate annual cash flows of $15,904 for the next three years. What is the internal rate of return if the company buys this machine?

Answer 1

Internal rate of return = 12%

Step-by-step explanation:

Below is the calculation of internal rate of return:

The new machine requires cash payment = $38198

Annual cash flows = $15904

Time period = 3 years

First divide the cash payment with the annual cash flow and then look at the factor table to find the interest rate at 3rd year.

Factor = 38198 / 15904 = 2.40

Now look the value 2.40 in the table:

Thus Internal rate of return = 12%