Question

In: Finance

Calculate the IRR for the following proposal: Machine cost $4,500,000 Set up cost $30,000 Training cost...

Calculate the IRR for the following proposal:

Machine cost $4,500,000
Set up cost $30,000
Training cost $30,000
Annual maintenance cost $15,000
Anticipated annual savings $477,000
Annual labor savings $40,000
Useful life in years 8
Overhaul cost in year 4 $30,000
Annual operating cost $27,000
Hurdle rate 8%
Salvage value $50,000
Depreciation method straight line

Solutions

Expert Solution

Calculation of IRR of the proposal
Year 0 1 2 3 4 5 6 7 8 IRR
Machine Cost -$4,500,000.00
Setup cost -$30,000.00
Training cost -$30,000.00
Maintenance cost -$15,000.00 -$15,000.00 -$15,000.00 -$15,000.00 -$15,000.00 -$15,000.00 -$15,000.00 -$15,000.00
Savings $477,000.00 $477,000.00 $477,000.00 $477,000.00 $477,000.00 $477,000.00 $477,000.00 $477,000.00
Labor savings $40,000.00 $40,000.00 $40,000.00 $40,000.00 $40,000.00 $40,000.00 $40,000.00 $40,000.00
Overhaul cost -$30,000.00
Operating cost -$27,000.00 -$27,000.00 -$27,000.00 -$27,000.00 -$27,000.00 -$27,000.00 -$27,000.00 -$27,000.00
Salvage value $50,000.00
Net Cash flow -$4,560,000.00 $475,000.00 $475,000.00 $475,000.00 $445,000.00 $475,000.00 $475,000.00 $475,000.00 $525,000.00 -3.73%
IRR of the proposal = -3.73%

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