Diamond Company Is Considering the Purchase of a New Machine

question 2

Multiple Choice

Diamond Company is considering the purchase of a new machine for $80,000.The machine would generate an annual cash flow of $14,767 for 6 years.At the end of six years, the machine would have no salvage value.The company's cost of capital is 10%.The company uses straight-line depreciation. ​
What is the internal rate of return for the machine rounded to the nearest percent? (Note: Round the discount factor to three decimal places.)

• A) 7%
• B) 9%
• C) 5%
• D) 3%

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates.

Yield To Maturity

The total return anticipated on a bond if it is held until the date it matures, including all payments of principal and interest.

Immunization

A strategy that matches durations of assets and liabilities so as to make net worth unaffected by interest rate movements.

Interest-Rate Risk

The potential for investment losses due to fluctuations in interest rates, affecting particularly fixed-income securities.