Question

A company is considering buying a new piece of machinery that costs $30,000 and has a salvage value of $8,000 at the end of its 5-year useful life. The machinery nets $5,000 per year in annual revenues. MARR = 8%. The internal rate of return (IRR) on this investment is between A. 2%-3%. B. 11%-12%. C. 6%-7%. D. 13%-14%. E. 4%-5%. Using the information in the previous question #5, if the company considering purchasing the machine uses a MARR of 8%, would you recommend that it be bought? A. I don't know what I would recommend B. I would flip a coin: heads, yes; tails, no. C. No. D. Yes. E. Maybe.

Answer 1

5

Let IRR be I%

NPW = -30000 + 5000 * (P/A, I, 5) + 8000 * (P/F, I, 5) = 0

5000 * (P/A, I, 5) + 8000 * (P/F, I, 5) = 30000

dividing by 1000

5 * (P/A, I, 5) + 8 * (P/F, I, 5) = 30

using trail and error

When I = 2%, 5 * (P/A, I, 5) + 8 * (P/F, I, 5) = 30.8131

When I = 3%, 5 * (P/A, I, 5) + 8 * (P/F, I, 5) = 29.7994

As the required value of 30 lies between these two interest rate, so IRR is in between 2% - 3%

option A is the correct answer

6

As MARR is 8%, and IRR is in between 2% - 3% and is below 8% so this project is not recommended

option C is the correct answer