Question

A company is considering investing in a new machine that requires a cash payment of $61,949 today. The machine will generate annual cash flows of $24,911 for the next three years.

QS 11-13 Internal rate of return LO P4

What is the internal rate of return if the company buys this machine? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Calculation of IRR

Present Value Factor = Initial Investment / annual cash flows
                                     = $61,949 / $24,911
                                     = 2.48681305

on seeing the present value of annuity Table in 3 year row, we get discount rate is 10% for Present Value Factor this value.

Hence, Internal Rate of Return = 10%