Question

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.Present Value of an Annuity of 1Period 8% 9% 10% 11% 12% 15%6 4.623 4.486 4.355 4.231 4.111 3.784What is the approximate internal rate of return for this investment?

Answer 1

The approximate internal rate of return for this investment is 10.8%.

Step-by-step explanation:

The internal rate of return (IRR) is the discount rate that results in a net present value of zero. To calculate the IRR for this investment, we need to find the discount rate that makes the present value of the cost savings equal to the initial cost of the equipment. In this case, the initial cost is $60,000 and the annual cost savings is $14,600 over 6 years. Using the present value of an annuity of 1 table, we can approximate the IRR to be 10.8%.

Answer 2

The correct answer is 12%

Step-by-step explanation:

The internal rate of return is a metric used to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Formula and Calculation for IRR

\begin{aligned} &\text{IRR}=\text{NPV}=\sum_{t=1}^{T}\frac{C_t}{\left(1+r\right)^t}-C_0=0\\ &\textbf{where:}\\ &C_t=\text{Net cash inflow during the period t}\\ &C_0=\text{Total initial investment costs}\\ &r=\text{The discount rate}\\ &t=\text{The number of time periods}\\ \end{aligned}

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IRR

where:

C t =Net cash inflow during the period t

C 0​ =Total initial investment costs

r=The discount rate

t=The number of time periods

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