Question

Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the internal rate of return? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

Between 10% and 12%

Between 8% and 10%

Between 6% and 8%

Between 12% and 14%

Answer 1

Between 12% and 14%

Internal rate of return is the rate at which net present value is zero.
Year		Cash flow
0		$     -4,00,000
1		$       1,00,000
2		$       1,00,000
3		$       1,00,000
4		$       1,00,000
5		$       1,75,000
IRR	=	=IRR(C4:C9)
IRR	=	12.28%
Working:
Cash flow in year 5	=	Annual cash increase	+	Salvage value
	=	$       1,00,000	+	$       75,000
	=	$       1,75,000