A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. What is the IRR for this investment?
A)11.18 percent.
B)12.98 percent.
C)15.24 percent.
D)12.00 percent.
E)18.00 percent.

Question

Quizplus · Accepted Answer

The IRR can be calculated using the formula:

NPV = - Cost + (CF1 / (1 + IRR)^1) + (CF2 / (1 + IRR)^2) + ... + (CFn / (1 + IRR)^n)

Where NPV is the net present value, CF is the cash flow in each period, and n is the number of periods.

In this case, the cost is $40 million and the cash flow in each period is $12 million. So we have:

NPV = -40 + (12 / (1 + IRR)^1) + (12 / (1 + IRR)^2) + (12 / (1 + IRR)^3) + (12 / (1 + IRR)^4) + (12 / (1 + IRR)^5)

Using a financial calculator or spreadsheet software, we can solve for IRR and find that it is approximately 15.24%. Therefore, the best choice is C.

A New Computer System Is Expected to Cost $40 Million