Question

Check ! Required information Use the following information for the Quick Study below. [The following information applies to the questions displayed below.) A company is considering investing in a new machine that requires a cash payment of $49,947 today. The machine will generate annual cash flows of $20,084 for the next three years. QS 26-13 Internal rate of return LO P4 What is the internal rate of return if the company buys this machine? (PV of $1. FV of $1. PVA of $1, and FVA of (Use appropriate factor(s) from the tables provided.) ces Amount Invested Annual Net Cash Flow = Present Value Factor Internal Rate of Return %

Answer 1

- х Solution.pdf - Adobe Acrobat Reader DC File Edit View Window Help Home Tools Solution.pdf X Sign In Internal Rate of Return (IRR) is the point where Net Present Value is 'O'. NPV = 0, means Present Value of Cash Inflows = Present Value of Cash Outflows Let us first write the information given: Cash Outflow at Year 0 Cash Flow for year 1-3 p.a. $ 49947 $ 20084 We have to calculate the rate at which, $ 49947 = PVAF for 3 years @ 'r' rate * $20084 PVAF = Present Value Annuity factor i.e. used for multiple same cash flows Let us try @ 10% 0.9091 PVF for year 1 @10% PVF for year 2 @10% PVF for year 3 @10% =1/1.1^1 =1/1.1^2 =1/1.143 0.8264 0.7513 Let us multiply each of them with the cash inflows of each years, we get answer as follows: Type here to search A) JENG 22:31 18/07/2020

- х Solution.pdf - Adobe Acrobat Reader DC File Edit View Window Help Home Tools Solution.pdf X Sign In Let us multiply each of them with the cash inflows of each years, we get answer as follows: Year 1 =0.9091 * $20084 $ 18,258.18 Year 2 =0.8264 * $20084 $ 16,598.35 Year 3 =0.7513 * $20084 $ 15,089.41 Total $ 49,945.94 This total is approximately equal to our cash outflow at year 0 Year O outflow PVAF of Cash Flows $ 49947 $ 49945.94 There is just a difference of $1 0.9132 If we want exact answer, let us try using 9.5% rate PVF for year 1 @9.5% =1/1.09511 PVF for year 2 @9.5% =1/1.095^2 PVF for year 3 @9.2% =1/1.095^3 0.8340 0.7617 2 © 1 / 2 Let us multiply each of them with the cash inflows of each years, we get answer as follows: Type here to search ^ ) JENG 22:32 18/07/2020

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