Question

(Ignore income taxes in this problem.) A Corporation is considering a machine that will save $8,000 a year in cash operating costs each year for the next six years. At the end of six years it would have no salvage value. If this machine costs $33,848 now, the machine's internal rate of return is closest to:

Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

rev: 01_14_2016_QC_CS-37603

A. 10%

B. 12%

C. 9%

D. 11%

Answer 1

			Present Value		Present Value
Year	Cash Flow	Discount Factor @ 10%	At 10%	Discount Factor @ 11%	At 11%
0	-33848	1.00	-33,848	1.00	-33848
1	8000	0.91	7,273	0.90	7207
2	8000	0.83	6,612	0.81	6493
3	8000	0.75	6,011	0.73	5850
4	8000	0.68	5,464	0.66	5270
5	8000	0.62	4,967	0.59	4748
6	8000	0.56	4,516	0.53	4277
		Net Present Value	994	Net Present Value	-4
	Since Net Present Value at Discount Factor @11% is Close to Zero.
	And at IRR, The NPV is zero
	So the IRR rate is 11%
	Answer is D