Capilano Inc. is considering whether to invest in the North Shore automated process, which gives rise...

Capilano Inc. is considering whether to invest in the North Shore automated process, which gives rise to staffing and other cost savings over the existing process. The data below relate to the process.

$

Investment outlay (400,000)

Year 1 annual cost savings 160,000

Year 2 annual cost savings 160,000

Year 3 annual cost savings 160,000

Year 4 annual cost savings 120,000

The required return is 15 per cent p.a.

Calculate the internal rate of return for the investment.

Expert Solution

Let irr be x%
At irr,present value of inflows=present value of outflows.

400,000=160,000/1.0x+160,000/1.0x^2+160,000/1.0x^3+120,000/1.0x^4

Hence x=irr=19.30%(Approx)

jeff jeffy answered 2 years ago

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