Question

Really need help with this, "-2 decimal places (Example: 0%, % sign required. Will accept decimal format rounded to 0 decimal places (ex: 0))

"Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.95 million and create incremental cash flows of $481,642.00 each year for the next five years. The cost of capital is 10.90%. What is the internal rate of return for the J-Mix 2000?"

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

Initial investment = Annuity * [1 - 1 / (1 + r)ⁿ] / r

1,950,000 = 481,642 * [1 - 1 / (1 + r)⁵] / r

Using trial and error method, i.e., after trying various values for R, lets try R as 7.47%

1,950,000 = 481,642 * [1 - 1 / (1 + 0.0747)⁵] / 0.0747

1,950,000 = 481,642 * [1 - 0.697531] / 0.0747

1,950,000 = 481,642 * 4.049116

1,950,000 = 1,950,000

Therefore, internal rate of return is 7.47%