In: Finance
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 |
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% | ||||||||||