Illustrative Problem 83 IRR ComputatioHEven Cash inoWs The m

Illustrative Problem 8.3. IRR ComputatioH-Even Cash inoWs The management of RST Manufacturing Corp. is considering a replacement of their old machine with a new one which is capable of performing some task much faster than the old one. The new machine cost P 25,000 inclusive of installation cost. This will reduce the labor cost by P 4,500 annually. The new machine has an estimated useful life of 10 Page Brealk years with no salvage value. The firm\'s minimum required rate of return is 15%. Required: Using the IRR method, should RST buy the new machine? Solution: IRR factor-P25, 000 / P4, 500 5.5555 Referring to the PVOA table, using 10 years as point of reference, th closest value is 5.6502, under 12%. To get the exact rate of return, we interpolate between 1296 and 1496 and this gives us the exact rate of return of 12.44%. Computed as follows: 12% 5.6502 10947 5.5555 4341 1496 5.2161 Exact discounted rate of return = 1296 + (.947/4341) (29) - 12.44% This means that the IRR promised by the project is 12.44%. This is less than the minimum renuirod

Solution

0.4341 is the difference between the values at IRR of 12% and IRR of 14%.

5.6502 - 5.2161 = 0.4341