Question

King’s Department Store is contemplating the purchase of a new machine at a cost of $23,586. The machine will provide $3,800 per year in cash flow for twelve 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

b. Should the project be undertaken?
  

	No
	Yes

Answer 1

a.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$23,586.. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 11.96%.

b.The project should be undertaken since the internal rate of return is higher than the cost of capital.

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