What is the IRR for a machine if the initial cost is 475,000 and life of the machine is 10 years? The salvage value for the machine is 15% of the initial cost. The benefits that the machine will bring in for the first year is $125,000 and will increase by 6% each year. The inflation applicable to first year costs of $45,000 is 4.5% per year.
Calculation of IRR of the machine | ||||||
Year | Initial cost | Benefits | Costs | Salvage Value | Net Cash flows | |
a | b | c | d | e | b+c+d+e | |
0 | -$475,000 | -$475,000 | ||||
1 | $125,000 | -$45,000 | $80,000 | |||
2 | $132,500 | -$47,025 | $85,475 | |||
3 | $140,450 | -$49,141 | $91,309 | |||
4 | $148,877 | -$51,352 | $97,525 | |||
5 | $157,810 | -$53,663 | $104,146 | |||
6 | $167,278 | -$56,078 | $111,200 | |||
7 | $177,315 | -$58,602 | $118,713 | |||
8 | $187,954 | -$61,239 | $126,715 | |||
9 | $199,231 | -$63,995 | $135,236 | |||
10 | $211,185 | -$66,874 | $71,250 | $215,561 | ||
IRR of the machine = | 17.46% | |||||
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