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

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%

jeff jeffy answered 2 years ago

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