Question

In: Economics

Presuming you will make a $500,000 dollar investment into your firm. The machine that you purchased...

Presuming you will make a $500,000 dollar investment into your firm. The machine that you purchased has a life span of 6 years. At the end of 6 years there will be no residual value left to the machine. If the machine will generate $145,000 annually what is your internal rate of return.

Recalculate your Internal Rate of return if the initial investment is $800,000 and investment will generate the following annual revenue.

Year 1   $150,000

Year 2   $125,000

Year 3   $175,000

Year 4   $150,000

Year 5   $120,000

Year 6   $100,000

Please do the calculations through excel.

If the financial institution charges you 4.2% interest should you make the investment? If you are making 1 payment annually during the 6 years what is your annual payment at an interest rate of 4.2%?

Solutions

Expert Solution

We will use IRR function in excel to calculate ROR in excel

Years Cash flow
0 -500000
1 145000
2 145000
3 145000
4 145000
5 145000
6 145000
IRR 18.6%
Years Cash flow
0 -800000
1 150000
2 125000
3 175000
4 150000
5 120000
6 100000
IRR 0.7%

If financial institutions charge 4.2% interest rate then we should make the investment in the first case as ROR is greater than the interest rate and we should not make the investment in the second case as ROR is less than the interest rate.

We will use PMT function in excel to calculate annual payment.

investment 500000
tenure 6
interest rate 4.20%
Annual payment 96,002.89
investment 800000
tenure 6
interest rate 4.20%
Annual payment

1,53,604.62

Showing formula in excel

Years Cash flow
0 -500000
1 145000
2 145000
3 145000
4 145000
5 145000
6 145000
IRR =IRR(B2:B8)
Years Cash flow
0 -800000
1 150000
2 125000
3 175000
4 150000
5 120000
6 100000
IRR =IRR(B12:B18)
investment 500000
tenure 6
interest rate 0.042
Annual payment =PMT(B23,B22,-B21)
investment 800000
tenure 6
interest rate 0.042
Annual payment =PMT(B28,B27,-B26)

Rahul Sunny answered 9 months ago
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