Question

A new magnetic crane for the junkyard will cost $120000 and will generate $27000 revenue per year for 6 years. The salvage value will be $30000 after the 6 years. Assume the equipment has a 7% MARR.

a) Determine the IRR for the machine. Please use interpolation.

b) Since the company requires at least 5% return on their investment, should the machine be purchased? Why?

Answer 1

a) IRR using Interpolation method,
The formula = L+((NPVL)/(NPVL-NPVH)*(H-L))
Where,
L = lower rate of interest
H = higher rate of interest  
NPVL = NPV at lower rate if interest
NPVH = NPV at higher rate if interest
NPVL =

Year	Cash flow	Discount factor (7%)	PV
0	-120000	1.00	-120000
1	27000	0.93	25234
2	27000	0.87	23583
3	27000	0.82	22040
4	27000	0.76	20598
5	27000	0.71	19251
6	57000	0.67	37982
		NPV	28687

NPVH =

Year	Cashflow	Discount factor(15%)	PV
0	-120000	1.00	-120000
1	27000	0.87	23478
2	27000	0.76	20416
3	27000	0.66	17753
4	27000	0.57	15437
5	27000	0.50	13424
6	57000	0.43	24643
		NPV	-4849

IRR = 0.07+(28687/(28687-(-4849.17))*(0.15-0.07)) = 13.84%

b) Yes the machine can be purchased as the IRR from the investment 13.84% which is greater than minimum rate of return 5%