Question

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $36,000. The annual cash inflows for the next three years will be: Year Cash Flow $18,000 16,000 11,000 Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method. a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal rate of return b. With a cost of capital of 12 percent, should the equipment be purchased? Yes O No

Answer 1

Cash Flows:
Year 0 = -$36,000
Year 1 = $18,000
Year 2 = $16,000
Year 3 = $11,000

Let IRR be i%

NPV = -$36,000 + $18,000/(1+i) + $16,000/(1+i)^2 + $11,000/(1+i)^3
0 = -$36,000 + $18,000/(1+i) + $16,000/(1+i)^2 + $11,000/(1+i)^3

Using financial calculator, i = 13.15%

IRR of the project is 13.15%

Yes, you should accept this project as IRR is higher than the required return.