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

option (A) 12%

Step-by-step 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 =
`(6,300)/(1.0r^1)+(6,300)/(1.0r^2)+(6,300)/(1.0r^3)+(6,300)/(1.0r^4)+(6,300)/(1.0r^5)`

on solving the above relation, we get

r ≈ 12%

Hence, option A is correct