8 pt X Company is considering buying a new machine that will

8 pt X Company is considering buying a new machine that will cost $150,000 and that will generate annual cash inflows of $32,450 for 6 years. What is the approximate internal rate of return (enter your rate as a decimal, so 1% would be 0.01) . AO 0.03 BO 0.0 CO 0.05 DO 0.06 EO 0.07 FO 0.08

Solution

Year Project Cash Flows (i) DF@ 10% (ii) PV of Project A ( (i) * (ii) ) DF@ 5% (ii) PV of Project A ( (i) * (ii) ) 0 -150000 1                (1,50,000.00) 1 (1,50,000.00) 1 32450 0.909                     29,500.00 0.952      30,904.76 2 32450 0.826                     26,818.18 0.907      29,433.11 3 32450 0.751                     24,380.17 0.864      28,031.53 4 32450 0.683                     22,163.79 0.823      26,696.70 5 32450 0.621                     20,148.90 0.784      25,425.42 6 32450 0.564                     18,317.18 0.746      24,214.69 CASH INFLOW                      (8,671.79) NPV      14,706.21 IRR = Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) 5% + 14706.21/(14706.21+8671.79)*5 8.00% Ans f) 0.08