The Conroy Co. wants to purchase a machine for a new product line that costs $138,750. The company's engineering department estimates the machine will last 10 years and provide an annual contribution margin of $25,000. Ignore income taxes. The internal rate of return to the nearest tenth of a percent is:
A) 12.4%
B) 11.6%
C) 13.46%
D) 12.64%

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of cash flows from an investment equal to zero. Here, the IRR is calculated by finding the rate that equates the present value of the annual contribution margin ($25,000) over 10 years to the initial investment ($138,750). Using financial calculators or IRR tables, the IRR is approximately 12.4%.