Question

ewport 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 $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the internal rate of return

Answer 1

49.19 %

Step-by-step explanation:

Internal Rate of Return is the interest rate that will make the present value of Cash Flows equal the price of the Initial Investment.

Year 1

Determine the Cash Flow streams of the Equipment.

Year O = - $900,000

Year 1 = $200,000

Year 2 = $400,000

Year 3 = $600,000

Year 4 = $800,000

Year 5 = $1,000,000

Year 6 = $1,200,000

Step 2

Calculation of IRR of Project A using a Financial Calculator :

($900,000) Cfj

$200,000 Cfj

$400,000 Cfj

$600,000 Cfj

$800,000 Cfj

$1,000,000 Cfj

$1,200,000 Cfj

Shift IRR/YR 49.19 %