Question

For the data shown, what is the Delta IRR for the difference between the cash flows of the higher initial cost machine and the lower initial cost machine? The increase in costs and benefits trend does not change when a new machine is put into action (The cost keep rising at 4% every year and the benefits increase by 5% every year for the 12 year project life).

	Machine A	Machine B
Initial cost	$65,000	$17,500
Life in years	12	6
Salvage after life	20%	15%
Benefits per year	$34,000	$11,400
Costs per year	$12,900	$6,800
Inflation	4%
Increase in benefits	5%

POSSIBLE ANSWERS. PLEASE CHOOSE ONE OF THE BELOW.		Around 17%
		Around 23%
		Around 37%
SOLVED ------> AROUND 41% IS THE ANSWER		Around 41%

Answer 1

Annual Net cash flow for Machine A is calculated in excel and screen shot provided below:

Now,

Annual Net cash flow for Machine B is calculated in excel and screen shot provided below:

Now,

Calculate difference in both cash flow and IRR of resultant cash flow is calculated in excel and screen shot provided below:

Delta IRR is 40.43% which is around 41%.

Option (D) is correct answer.