Question

An investment that costs $253,406 will reduce operating costs by $32,130 per year for 11 years. Determine the internal rate of return of the investment (ignore taxes). (Round present value factor calculations to 4 decimal places, e.g. 1.2151 and final answer to 0 decimal places, e.g. 17%.)

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Internal rate of return

enter internal rate of return in percentages rounded to 0 decimal places %

Should the investment be undertaken if the required rate of return is 10 percent?

The investment select an option                                                          should notshould be undertaken.

Answer 1

To calcluate IRR, we have to calculate IRR at two rates

NPV = P.V of cash inflows - P.V of cash outflows

NPV @ 5% (R1) =32,130 *8.3064- 253,406 = 13,479.632

NPV @ 10% (R2) =  32,130 *6.4951 - 253,406 = (44,718.437)

IRR = R1 + NPV1(R2 – R1)/ NPV1 – NPV2

IRR = 5 + 13479.632 (10-5)/ 13479.632 - (-44,718.437) = 5 + 67,398.16/ 58,198.069 = 5 + 1.158 = 6.158%

Internal rate of return in percentages rounded to 0 decimal places % - 6%

No, The investment should not be undertaken as IRR (6%) is less than the required rate of return (10%)