Question

Kanye Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $175,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $33,612

What is its approximate internal rate of return?

Answer 1

	To compute the internal rate of return we need to calculate
	NPV at 2 discount rate which gives us positive and negative NPV and then we have
	to interpolation method.
	Let us calculate NPV at5 % and 10% discount rate
		10%	5%
a	Annual cash flow	$       33,612.00	$       33,612.00
b	PV Annuity Factor for 7 years	4.86842	5.78637
c	PV of annual cash flow (a*b)	$   1,63,637.29	$   1,94,491.58
d	Initial investment	$   1,75,000.00	$   1,75,000.00
e	NPV (c-d)	$     -11,362.71	$       19,491.58
	IRR = 5% + (19491.58/[19491.58+11362.71]) * 5
	=5 % + 3.159%
	=8.16% (approx)
	=8% (exact IRR using excel function)