Question

An engineer who works for Zpac is pitching a project for a new machine to his management. Zpac’s MARR is 12%. To finance this project, Zpac would have to invest $34,000 immediately and then $5000 each year for the next five years starting one year from now. The project is expected to generate revenue of $10000 one year from now, and then the revenue would increase by $2000 each year through year 4. The revenue in year 5 would be $24,000. a. Determine the rate of return for this project by hand NOT EXCEL please

Answer 1

Year	Cash outflow (A)	Cash inflow (B)	Net cash flow (C=A-B)	PV factor @ 12%(D)	Present value (C*D)	PV factor @ 16% (E)	Present value(C*E)
0	-34000		-34000	1	-34000	1	-34000
1	-5000	10000	5000	0.8929	4464.29	0.8621	4310.34
2	-5000	12000	7000	0.7972	5580.36	0.7432	5202.14
3	-5000	14000	9000	0.7118	6406.02	0.6407	5765.92
4	-5000	16000	11000	0.6355	6990.70	0.5523	6075.20
5	-5000	24000	19000	0.5674	10781.11	0.4761	9046.15

NPV @ 12% = -34,000 + 4464.29 + 5580.36 + 6406.02 + 6990.70 + 10781.11 = $222.47

NPV @ 16% = -34000 + 4310.34 + 5202.14 + 5765.92 + 6075.20 + 9046.15 = -$3600.25

IRR = Lower discount rate + (NPV using lower discount rate * (higher discount rate - lower discount rate)) / ((NPV using lower discount rate - NPV using higher discount rate)

= 12% + ($222.47 * (16% - 12%)) / ($222.47 - (-$3600.25))

= 12% + ($222.47 * 4%) / $3822.72

= 12% + 0.23

= 12.23%

Rate of return = 12.23%

Note : By using the excel, the answer is 12.21%