Question

Is the following solution for the following question correct or not ? and if it's wrong where is the mistake and how to correct it?

Imagine that you own (250,000$) and you want to invest it in your dream plan. You have to consider two different alternatives. For each alternative, estimate the initial cost and annual cash flow details (operation and maintenance costs, raw material, salaries, overheads…etc.). Then compare these alternatives based on ROR criteria.

Note: you don’t need to consume the 250,000$, any cheaper investments are fine. Any larger investment is allowable under loan consideration or suitable explanation.

Since I am a mechanical Engineer, I decided to choose establishment of a Typical Automobile maintenance center:

The project life considered to be 10 years

#	Type of expense	Amount
1	Fixed Assets cost	100,000$
2	Premises rent	20,000$
3	Operation cost	15,285$
4	Maintenance for equipment cost	3,500$
5	Salaries	68,571$
6	Administration cost (Tax, Registration, …etc)	10,000$
7	Overhead	7,000$

100,000$ will be the initial cost payed once at the beginning of the project (year 0)

The running costs will be 124,356$ paid annually along the project life cycle with an annual increase of 2%

The expected revenue for the project is 170,340$ and expected to increase by 3% annually since the automobiles will need more repairs when it becomes older

The salvage value for the project will be 20,000$

Year	Type of cost	Cost	Revenue	Salvage	Net cash Flow	PV Factor @ i= 18%	PV @ i=18%	PV Factor @ i= 50%	PV @ i=50%	PV Factor @ i = 60%	PV @ i=60%
0	Establishment cost	-100000	0		-100,000	-	-100000		-100000		-100000
1	Running cost	-124,356	170,340		45,984	0.8475	38971.44	0.6667	30657.53	0.625	28740.00
2	Running cost	-126,843	175,450		48,607	0.7182	34909.60	0.4444	21600.99	0.3906	18985.93
3	Running cost	-129,380	180,714		51,334	0.6086	31241.70	0.2963	15210.18	0.2441	12530.56
4	Running cost	-131,968	186,135		54,168	0.5158	27939.61	0.1975	10698.09	0.1526	8265.97
5	Running cost	-134,607	191,719		57,112	0.4371	24963.76	0.1317	7521.68	0.0954	5448.51
6	Running cost	-137,299	197,471		60,172	0.3704	22287.59	0.0878	5283.07	0.0596	3586.23
7	Running cost	-140,045	203,395		63,350	0.3139	19885.51	0.0585	3705.96	0.0373	2362.95
8	Running cost	-142,846	209,497		66,651	0.266	17729.10	0.039	2599.38	0.0233	1552.96
9	Running cost	-145,703	215,782		70,079	0.2255	15802.76	0.026	1822.05	0.0146	1023.15
10	Running cost	-148,617	222,255	20,000	93,638	0.1911	17894.25	0.0173	1619.94	0.00909	851.17
						NPV =	151625.32	NPV =	718.87492	NPV =	-16652.6
	Total	1,461,664	1,952,757

So @ i = 50% , PV = 718.87$

& @ i = 60% , PV = - 16652.6$

So the internal rate of return will be between 50% and 60% , using Interpolation IRR = 50.41%

Using IRR Excel command for estimating the IRR value , IRR = 50.353%

Answer 1

I have cheked your calculations on excel and they are spot on, you calculations are correct.

I am attaching my excel for yoyr reference.