A company is considering buying a machine that would give a net cost savings of $70,000...

A company is considering buying a machine that would give a net cost savings of $70,000 per year for 10 years. The cost of the machine is $325,000. The company’s weighted average cost of capital is 12%.

What is the difference between the IRR and the ARR?

Solutions

Expert Solution

Solution:-

First we need to calculate IRR of the Project-

The IRR of the Project is 17.09%

IRR(Internal rate of Return) is the rate on which Net present value of all the cash flows from the project is equal to zero. Manager to rank the Project on the Basis of IRR and preferred the highest IRR for investment. IRR is higher the better. IRR is best for analysing venture capital and Private equity investment which have multiple cash flows over the period of investment and single cash outflow.

APR(Annual Percentage Rate) is the interest rate of cost of borrowing the principal. It is the rate effective for comparing at the time of taking loan. APR is lower the better. When the Borrower take two loan then Borrower prefer the lowest nominal rate which likely to be best value.

If you have any query related to question then feel free to ask me in a comment. Thanks.

jeff jeffy answered 1 year ago

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