Question

Simon is the product manager for Packaging Plus. Simon purchased a new packaging machine for $125,000 to save on labor costs. The first year, the machine worked well and the company was able to save $60,000, with machine operating and maintenance expenses of $25,000. The second year, operating expenses were slightly higher at $28,000, but savings increased to $80,000. The third year, expenses increased again to $30,000, and savings decreased to $65,000. The fourth year, the machine began to experience some problems and broke down quite a bit. Expenses were $40,000 and savings decreased even further to $50,000. The company sold the machine for scrap at the end of year 4 for $5,000. What is the actual IRR for this purchase?

Answer 1

We have to find net cash flow each year and find IRR

using Excel

Year	Investment	Savings	O&M Cost	Salvage value	Net cash flow
0	-125000				-125000
1		60000	-25000		35000
2		80000	-28000		52000
3		65000	-30000		35000
4		50000	-40000	5000	15000
				IRR	4.25%

Showing excel formula

Year	Investment	Savings	O&M Cost	Salvage value	Net cash flow
0	-125000				=B2+C2+D2+E2
1		60000	-25000		=B3+C3+D3+E3
2		80000	-28000		=B4+C4+D4+E4
3		65000	-30000		=B5+C5+D5+E5
4		50000	-40000	5000	=B6+C6+D6+E6
				IRR	=IRR(F2:F6)