Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. The annual cash inflows for the next three years will be:
Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. The annual cash inflows for the next three years will be:
| Year | Cash Flow | |||
| 1 | $ | 48,000 | ||
| 2 | 46,000 | |||
| 3 | 41,000 | |||
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.)
Homework Answers
Let irr be x%
At irr,present value of inflows=present value of outflows.
Hence
95000=48000/1.0x+46000/1.0x^2+41000/1.0x^3
Hence x=IRR=20.463%.(Approx)
=20.46%(Approx).
b.Since IRR is greater than cost of capital,equipment should be purchased.
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