Question

An investment of $20,000 for a new condenser is being considered. Estimated salvage value of the condenser is $5,000 at the end of an estimated life of 6 years. Annual income each year for the 6 years is $8,500. Annual operat- ing expenses are $2,300. Assume money is worth 15% compounded annually. Determine the internal rate of return and whether or not the condenser should be purchased.

Answer 1

IRR is The Rate at which PV of Cash Inflows are equal to PV of Cash Outflows

Year	CF	PVf @24%	Disc CF	PVF @25%	Disc CF
0	$ -20,000.00	1.0000	$ -20,000.00	1.0000	$ -20,000.00
1	$    6,200.00	0.8065	$    5,000.00	0.8000	$    4,960.00
2	$    6,200.00	0.6504	$    4,032.26	0.6400	$    3,968.00
3	$    6,200.00	0.5245	$    3,251.82	0.5120	$    3,174.40
4	$    6,200.00	0.4230	$    2,622.44	0.4096	$    2,539.52
5	$    6,200.00	0.3411	$    2,114.87	0.3277	$    2,031.62
6	$ 11,200.00	0.2751	$    3,080.97	0.2621	$    2,936.01
NPV			$        102.36		$      -390.45

IRR = Rate at which least +ve NPV + [ NPV at that rate / Chage in NPV due to 1% inc in disc Rate ] *1%

= 24% + [ 102.36 / 492.81 ] * 1%

= 24% + 0.21%

= 24.21%