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Krauth Company purchased a machine for $162,600. The machine has a life of twelve years with no salvage value. It is expected that the machine will generate annual net cash inflows of $30,000 per year over its useful life. Assume Krauth Company employs a cost of capital of 10% on all capital investment projects. The internal rate of return (IRR) on the machine is closest to:

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Answer:

The internal rate of return (IRR) on the machine is closest to 15%

Explanation:

We can use excel to calculate IRR as file attached. And IRR of this project is 15%

Or we can calculate NPV of this project with discount rate to make NPV = 0

NPV = PV of investment + PV of all cash flow in 12 years = 0

PV of investment = $162,600

PV of cashflow = 30,000/(1+ IRR)^ year = 30,000/(1+ IRR)^1 + 30,000/(1+ IRR)^2 +…… +30,000/(1+ IRR)^12

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