Question

A company is considering buying a new piece of machinery that costs $20,000 and has a salvage value of $6,000 at the end of its 5-year useful life. The machinery nets $5,000 per year in annual revenues. The internal rate of return (IRR) on this investment is between__________.

	A.	10%-11%
	B.	12%-13%
	C.	14%-15%
	D.	13%-14%
	E.	None of the above

Using the information in the previous Problem #6, if the company considering purchasing the machine uses a MARR of 12%, would you recommend that it be bought?

	A.	I don't know what I'd recommend
	B.	I would flip a coin: Heads = yes, Tails = no
	C.	No
	D.	Yes

Answer 1

1.

Let IRR be i%, then

5000*(P/A,i%,5) + 6000*(P/F,i%,5) = 20000

dividing by 1000

5*(P/A,i%,5) + 6*(P/F,i%,5) = 20

using trail and error method

When i = 14%, value of 5*(P/A,i%,5) + 6*(P/F,i%,5) = 5*3.433081 + 6*0.519369 = 20.28161

When i = 15%, value of 5*(P/A,i%,5) + 6*(P/F,i%,5) = 5*3.352155 + 6*0.497177 = 19.74383

using interpolation

i = 14% + (20.28161-20) /(20.28161-19.74383)*(15%-14%)

i = 14% + 0.52% = 14.52%

it is in between 14% - 15% (option C)

option C is correct answer

2.

As IRR (14.52%) > MARR (12%), project should be selected

option D is correct answer