Canton Corporation is considering the acquisition of a new machine that costs $149,040. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $45,000. Canton evaluates investments by using the internal rate of return and ignores income taxes.Required:A. Briefly define the internal rate of return.B. What relationship holds true at the internal rate of return with respect to discounted cash inflows and discounted cash outflows? With respect to net present value?C. Compute the machine's internal rate of return, using the tables that follow.
What will be an ideal response?
A. The internal rate of return is the true economic yield on a project, taking the time value of money into consideration.
B. At the internal rate of return, the present value of the cash inflows equals the present value of the cash outflows. Thus, the net present value is zero.
C. $149,040 รท $45,000 = 3.312, which corresponds with the factor of an 8% return on a four-year project.
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