The mayor of Trenton is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased:Year Savings1 $20,000 2 25,000 3 30,000 4 15,000 5 12,000 What can be said about the computer system's internal rate of return if the net present value at 12% is positive? Trenton uses a 10% discount rate for capital-budgeting decisions.
A. The internal rate of return must be less than 5%.
B. The internal rate of return is between 10% and 12%.
C. The internal rate of return is less than 10%.
D. The internal rate of return is greater than 12%.
E. There is insufficient information to make any judgment about the internal rate of return.
Answer: D
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