Question

What is the IRR for Machine C over a 4-year project life with the following details:

	Machine C
Initial cost	$225,000
Life in years	2
Salvage after life	25%
Benefits 1st year	$195,000
Costs 1st year	$95,800
Inflation	5.50%
All benefits keep increasing every year	6.50%
even when a new machine is bought.

11.4%

10.9%

9.46%

-2.7%

Answer 1

Solution:- Given in Question-

Initial Cost = $2,25,000

Life = 2 years

Salvage Value = $2,25,000 * 25% = $56,250

Cash Flow for Year 1-

Cash Flow = Benefit - Cost

Cash Flow = $1,95,000 - $95,800

Cash Flow = $99,200

Cash Flow for Year 2-

Benefit after Increasing 6.50% = $1,95,000 ( 1 + 0.065) = $2,07,675.

Cost after Inflation = $95,800 ( 1 + 0.055) = $1,01,069

Cash Flow = Benefit - Cost + Salvage Value

Cash Flow = $2,07,675 - $1,01,069 - $56,250

Cash Flow = $1,62,856.

IRR For Machine C-

Correct Answer is 9.93%.

Please check figure at your end as this is not avaliable in Options.

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