Question

King's department store is contemplating the purchase of a new machine at a cost of 22,802. The machine will provide3,500 per year in cash flow for nine years. King's has a cost of capital of 10 percent. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method. What is the internal rate of return?

Answer 1

To compute the Internal Rate of Return for King's department store's new machine using a financial calculator, input the initial investment as the present value, annual cash flow as the payment, and set the number of periods to the duration of the cash flow. Compare the resultant IRR to the cost of capital to evaluate the investment.

Step-by-step explanation:

The revolves around the concept of Internal Rate of Return (IRR), which is crucial in the field of finance and capital budgeting. To calculate the IRR for King's department store's potential machine purchase, one uses the cash flows generated by the machine and the initial investment cost. In this instance, the machine costs $22,802 and promises annual cash flows of $3,500 for nine years.

To perform the calculation using a financial calculator, input the following: negative initial investment (-$22,802) as the 'PV' (present value), annual cash flow of $3,500 as the 'PMT' (payment), and the number of periods (9) as 'N'. The calculator will use these figures to compute the IRR. This IRR can then be compared to the company's cost of capital to determine if the investment would yield a satisfactory return.