Question

King’s Department Store is contemplating the purchase of a new machine at a cost of $18,139. The machine will provide $3,400 per year in cash flow for eight years. King’s has a cost of capital of 9 percent. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method.


a. What is the internal rate of return?

Answer 1

Answer:

10%

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator:

Cash flow in year zero = -$18,139. 

Cash flow each year from year one to eight = $3,400 

IRR = 10%

To enter the cash flows, click on the CF key on the financial calculator, input value and press the enter key. Press the arrow pointing downwards to input the next cash flow value.

To find IRR, press the IRR button, and press CPT.

I hope my answer helps you