Asked by vaughn peens on May 05, 2024
Verified
Mc Gee Corporation recently purchased a new machine for its factory operations at a cost of $840000. The investment is expected to generate $250000 in annual cash flows for a period of five years. The required rate of return is 12%. The new machine is expected to have zero salvage value at the end of the five-year period.
Instructions
Calculate the internal rate of return. (Table 2 from Appendix C is needed.)
Salvage Value
The anticipated salvage value of an asset at the termination of its service life.
Annual Cash Flows
The total amount of money being transferred into and out of a business, especially affecting liquidity, within a year.
Internal Rate Of Return
A financial metric used to evaluate the profitability of investments, representing the interest rate at which the net present value of costs and benefits of a project break even.
- Obtain a thorough understanding of the essential ideas and operations of capital budgeting, such as net present value, internal rate of return, and payback period.
Verified Answer
$840000 ÷ $250000 = 3.36. This factor is found in the PVA table at n = 5 periods.
IRR = 15%
Learning Objectives
- Obtain a thorough understanding of the essential ideas and operations of capital budgeting, such as net present value, internal rate of return, and payback period.
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