Question

IRR

Latin Cuisine is considering the purchase of new food processing technology, which would cost $1,800,000 and would generate $300,000 in annual cost savings. No salvage is expected on the technology at the end of its 10-year life. The firm's cost of capital and discount rate are both 10 percent.
a. Calculate the internal rate of return for the project. Note: Round percentage to one decimal point (i.e. round 4.555% to 4.6% ). ___ %
b. Does the IRR indicate the project is acceptable?

Answer 1

The internal rate of return (IRR) for the project is approximately 21.1%. The IRR indicates that the project is acceptable.

Step-by-step explanation:

To calculate the internal rate of return (IRR) for the project, we need to find the discount rate at which the present value of the cost savings from the new technology equals the initial cost of the technology. In this case, the initial cost is $1,800,000 and the annual cost savings is $300,000. We can set up the following equation:

1,800,000 = 300,000/(1+r) + 300,000/(1+r)^2 + ... + 300,000/(1+r)^10

By solving this equation, we find that the internal rate of return is approximately 21.1%.

Since the internal rate of return (21.1%) is greater than the firm's cost of capital and discount rate (10%), the project is considered acceptable. The IRR indicates that the project will generate a return higher than the cost of capital, making it a good investment for IRR Latin Cuisine.

Answer 2

The internal rate of return (IRR) for the project is approximately 16.7%, indicating that the project is acceptable.

Step-by-step explanation:

The internal rate of return (IRR) for the project can be calculated by finding the discount rate that makes the net present value (NPV) of the project equal to zero. In this case, the initial investment is $1,800,000 and the annual cost savings is $300,000 for 10 years. Using a financial calculator or spreadsheet software, the IRR can be calculated to be approximately 16.7%.

The IRR indicates the project is acceptable if it is greater than the firm's cost of capital, which in this case is 10 percent. Since the calculated IRR is 16.7%, which is higher than the cost of capital, the project is acceptable.