Question

Machine A costs $850,000 and would produce cash flows of $220,000 per year for the first two years, $350,000 per year for the next two years, and $150,000 in the final year Machine B costs $650,000 and would produce cash flows of $250,000 per year for the first two years. $200.000 the following year $150,000 in its fourth year, and $140,000 in its final year. Your required return is 11% What is the IRR of buying machine B? A. 18.13% B. 18 46% C. 17.25% D. 18 85%

Answer 1

Answer is 18.13%

Machine B:

Cash Flows:
Year 0 = -$650,000
Year 1 = $250,000
Year 2 = $250,000
Year 3 = $200,000
Year 4 = $150,000
Year 5 = $140,000

Let IRR be i%

NPV = -$650,000 + $250,000/(1+i) + $250,000/(1+i)^2 + $200,000/(1+i)^3 + $150,000/(1+i)^4 + $140,000/(1+i)^5
0 = -$650,000 + $250,000/(1+i) + $250,000/(1+i)^2 + $200,000/(1+i)^3 + $150,000/(1+i)^4 + $140,000/(1+i)^5

Using financial calculator, i = 18.13%

Internal Rate of Return = 18.13%