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
1		$	18,000
2			16,000
3			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.)
  

b. With a cost of capital of 12 percent, should the equipment be purchased?

• Yes

• No

Answer 1

a

equipment
IRR is the rate at which NPV =0
IRR	0.131473459
Year	0	1	2	3
Cash flow stream	-36000	18000	16000	11000
Discounting factor	1	1.131473	1.280232	1.448549
Discounted cash flows project	-36000	15908.46	12497.73	7593.807
NPV = Sum of discounted cash flows
NPV equipment =	4.01784E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	13.15%
b. Accept project as IRR is more than discount rate