Question
In: Economics
Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit...
Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $70,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,500 per year using the gang punch, but raw material costs would decrease $12,500 per year. MARR is 5%/year.
What is the internal rate of return? (round final answer to one decimal place)
***Please show using Excel in detail
Solutions
Expert Solution
Using IRR function in Excel
| Year | investment | Annual savings | Annual cost | Net Cash flow |
| 0 | -70000 | -70000 | ||
| 1 | 12500 | -2500 | 10000 | |
| 2 | 12500 | -2500 | 10000 | |
| 3 | 12500 | -2500 | 10000 | |
| 4 | 12500 | -2500 | 10000 | |
| 5 | 12500 | -2500 | 10000 | |
| 6 | 12500 | -2500 | 10000 | |
| 7 | 12500 | -2500 | 10000 | |
| 8 | 12500 | -2500 | 10000 | |
| 9 | 12500 | -2500 | 10000 | |
| 10 | 12500 | -2500 | 10000 | |
| 11 | 12500 | -2500 | 10000 | |
| 12 | 12500 | -2500 | 10000 | |
| 13 | 12500 | -2500 | 10000 | |
| 14 | 12500 | -2500 | 10000 | |
| 15 | 12500 | -2500 | 10000 | |
| IRR | 11.5% |
IRR = 11.5%
As IRR > MARR, this project is acceptable
Showing formula in Excel
| Year | investment | Annual savings | Annual cost | Net Cash flow |
| 0 | -70000 | =B2+C2+D2 | ||
| 1 | 12500 | -2500 | =B3+C3+D3 | |
| 2 | 12500 | -2500 | =B4+C4+D4 | |
| 3 | 12500 | -2500 | =B5+C5+D5 | |
| 4 | 12500 | -2500 | =B6+C6+D6 | |
| 5 | 12500 | -2500 | =B7+C7+D7 | |
| 6 | 12500 | -2500 | =B8+C8+D8 | |
| 7 | 12500 | -2500 | =B9+C9+D9 | |
| 8 | 12500 | -2500 | =B10+C10+D10 | |
| 9 | 12500 | -2500 | =B11+C11+D11 | |
| 10 | 12500 | -2500 | =B12+C12+D12 | |
| 11 | 12500 | -2500 | =B13+C13+D13 | |
| 12 | 12500 | -2500 | =B14+C14+D14 | |
| 13 | 12500 | -2500 | =B15+C15+D15 | |
| 14 | 12500 | -2500 | =B16+C16+D16 | |
| 15 | 12500 | -2500 | =B17+C17+D17 | |
| IRR | =IRR(E2:E17) |
Rahul Sunny answered 1 year agoRelated Solutions
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