Question

20 minutes Ageist Corporation distributes agricultural equipment. An electronically controlled crop-sprayer project would require an investment of $10 million in assets and would produce an annual net benefit of $1.8 million over a service life of eight years. When the project terminates, the net proceeds from the sale of the assets would be $1 million.

(a) Calculate the IRR on this investment by using the interpolation method.
(b) If Ageist's MARR is known to be 8%, is this investment justifiable?

Answer 1

a)

The cash flows associated with the project is shown in the following table.

In the above equation, solving for the value of r gives the internal rate of return. The value of r is obtained by trial and error method.

Let r = 9%

At 9% discount rate, the present value of annual net benefits is calculated to be = $10,464,540.69 ( hiogher than initial investment)

At 10% discount rate, the present value of annual net benefits is calculated to be = $ 10,069,374.54

At 11% discount rate, the present value of annual net benefits is calculated to be = $ 9,696,947.466

The internal rate of return is between 10% and 11%

IRR on this investment = 10.19%

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b)

The investment is justifiable because the IRR on this investment is greater than the MARR of 8%. When the IRR is higher than MARR, the present value of benefits will be greater than the present value of costs and the investment is economically feasible.