Question

You’re a project engineer and want to figure out the internal rate of return on switching to a new process with new equipment. If this new equipment requires an initial investment of $5,500 but generates a net profit of $1,325 per year for the following 6 years, then what is the project's internal rate of return? Use interpolation methods or a spreadsheet to calculate your answer. Express your answer as a percentage value rounded to the nearest tenth of a percent (e.g. if you believe the answer to be 1.2%, enter 1.2). You may want to use linear interpolation.

Answer 1

Computation of NPV at discount rate of 10%.

-$5,500 + [$1,325 * PVAF(10% , 6 years)]

= -$5,500 + ($1,325 * 4.35526)

= $270.72

Computation of NPV at discount rate of 13%.

-$5,500 + [$1,325 * PVAF(13% , 6 years)]

-$5,500 + ($1,325 * 3.99755)

-203.247

Computation of IRR using Interpolation method

IRR = 10% + [270.72 / (270.72 - (-203.247)] * ( 13% - 10%)

IRR = 10% * 1.7%

IRR = 11.7%

So, IRR = 11.7