Question

A) an investment of $500,000 generates annual income of $50,000 for the next 10years with a salvage value of $450,000. at MARR=10%, is this a good investment.

B) Determine the IRR.

Answer 1

ANSWER:

We need to find the present worth of the project .

i =10% and n = 10 years

pw = initial investment + annual income(p/a,i,n) + salvage value(p/f,i,n)

pw = -500,000 + 50,000(p/a,10%,10) + 450,000(p/f,10%,10)

pw = -500,000 + 50,000 * 6.145 + 450,000 * 0.3855

pw = -500,000 + 307,250 + 173,475

pw = -500,000 + 480,725

pw = -19,275

since the present worth is negative it is not a good investment.

B) IRR:

In order to find the irr we will have to equate the pw to zero.

pw = initial investment + annual income(p/a,i,n) + salvage value(p/f,i,n)

0 = -500,000 + 50,000(p/a,i,10) + 450,000(p/f,i,10)

500,000 = 50,000(p/a,i,10) + 450,000(p/f,i,10)

solving via trial and error we get that i is between 9% and 10% and solving further we get that i is 9.35%