Copa Corporation is considering the purchase of a new machine costing $150,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa’s cost of capital is 12 percent. Copa uses straight-line depreciation. The present value factors of annuity of $1.00 for different rates of return are as follows: Period 12% 14% 16% 18%
4 3.0373 2.91371 2.79818 2.69006
5 3.60478 3.43308 3.27429 3.12717
6 4.1141 3.88867 3.68474 3.49760
The proposal's internal rate of return (rounded to the nearest percent) is:
A. 14 percent.
B. 16 percent.
C. 18 percent.
D. 12 percent.

A

Explanation:

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator  

Cash flow in year 0 = $-150,000

Cash flow each year from year 1 to 5 = $43,690

IRR = 14%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

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