7 A company invests AED 110000 in a project with a lifetime

7. A company invests AED 110,000 in a project with a lifetime of 35 years. The project gives an annual income of AED 12,000. The yearly maintenance costs are AED 3,500 and the salvage value for the project after 35 years is AED 20,500. There is a single extra cost at the end of ten years of AED 20,800 for renovation of the project. Calculate the Internal Rate of Return for the project. Use interest rate values of 5 and 7 percent and interpolate the IRR linearly.

Solution

Internal rate of return at which Present Worth of Benefits equal to Present worth of Costs

Present Worth will be calculated as =CF/(1+r)^t

CF=Cash Flow

r= rate of return

t=no of periods

PW(Benefits)=12000/(1+irr)+12000/(1+irr)^2+12000/(1+irr)^3+...+12000/(1+irr)^35+20500/(1+irr)^35

PW(Costs)=110000+3500/(1+irr)+3500/(1+irr)^2+3500/(1=irr)^3+..+3500/(1+irr)^35+20800/(1+irr)^10

then after using 5% and 7% we get 6.3109 as Internal rate of return