Question

Kanye Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $177,000, has a estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $35,168.Click here to view PV table. What is its approximate internal rate of return? (Round answer to 0 decimal place, e.g. 125.) Internal rate of return Internal rate of return

Answer 1

Correct Answer:

IRR = 9%

Working:

years	cash (outflow) inflow	PV@5%	Present value of cash flow	PV@10%	Present value of cash flow
0	$   (177,000.00)	$            1.0000	$   (177,000.00)	$          1.0000	$ (177,000.00)
1	$       35,168.00	$            0.9524	$        33,493.33	$          0.9091	$      31,970.91
2	$       35,168.00	$            0.9070	$        31,898.41	$          0.8264	$      29,064.46
3	$       35,168.00	$            0.8638	$        30,379.44	$          0.7513	$      26,422.24
4	$       35,168.00	$            0.8227	$        28,932.80	$          0.6830	$      24,020.22
5	$       35,168.00	$            0.7835	$        27,555.05	$          0.6209	$      21,836.56
6	$       35,168.00	$            0.7462	$        26,242.90	$          0.5645	$      19,851.42
7	$       35,168.00	$            0.7107	$        24,993.24	$          0.5132	$      18,046.74
Net present value		NPV 1 =	$        26,495.18	NPV 2 =	$      (5,787.45)

IRR Formula	R1 + (NPV1/(NPV1-NPV2)*(R2-R1)
NPV1	$                                    26,495.18
NPV2	$                                    (5,787.45)
NPV1 - NPV 2	$                                    32,282.63
NPV1/(NPV1-NPV2)	$                                              0.82
R1	5%
R2	10%
R2-R1	5%
IRR	9%

End of answer.

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