Question

Suppose you pay $100, 000 now for a piece of equipment which earns you $50, 000 a year for the next 4 years. At the end of year 4, you can resell the piece of equipment for $30, 000. (a) What is the internal rate of return on this investment? (b) Suppose that you also have to pay $10, 000 in year 2 for a repair. What is the internal rate of return now?

Answer 1

a

Equipment
IRR is the rate at which NPV =0
IRR	0.401690644
Year	0	1	2	3	4
Cash flow stream	-100000	50000	50000	50000	80000
Discounting factor	1	1.401691	1.964737	2.753953	3.8601902
Discounted cash flows project	-100000	35671.21	25448.7	18155.72	20724.368
NPV = Sum of discounted cash flows
NPV Equipment =	1.4461E-08
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	40.17%

b

Equipment
IRR is the rate at which NPV =0
IRR	0.369775698
Year	0	1	2	3	4
Cash flow stream	-100000	50000	40000	50000	80000
Discounting factor	1	1.369776	1.876285	2.57009	3.5204471
Discounted cash flows project	-100000	36502.33	21318.72	19454.57	22724.386
NPV = Sum of discounted cash flows
NPV Equipment =	0.000345499
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	36.98%