Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.64 million and create incremental cash flows of $526,063.00 each year for the next five years. The cost of capital is 9.89%. What is the internal rate of return for the J-Mix 2000? (Round to 2 decimal places in percentages.)
IRR is the rate at which NPV = 0
IRR can be calculated using either a financial calculator or excel
or through hit and trial:
Using Excel we get the IRR = 18.14% rounded to two decimal
places
Below is the schedule:
| Year | CF | Discount Factor | Discounted CF | ||
| 0 | $ -16,40,000.00 | 1/(1+0.181369166119754)^0= | 1 | 1*-1640000= | $ -16,40,000.00 |
| 1 | $ 5,26,063.00 | 1/(1+0.181369166119754)^1= | 0.846475453 | 0.846475452956448*526063= | $ 4,45,299.42 |
| 2 | $ 5,26,063.00 | 1/(1+0.181369166119754)^2= | 0.716520692 | 0.716520692457824*526063= | $ 3,76,935.03 |
| 3 | $ 5,26,063.00 | 1/(1+0.181369166119754)^3= | 0.606517178 | 0.606517177700904*526063= | $ 3,19,066.25 |
| 4 | $ 5,26,063.00 | 1/(1+0.181369166119754)^4= | 0.513401903 | 0.513401902720239*526063= | $ 2,70,081.75 |
| 5 | $ 5,26,063.00 | 1/(1+0.181369166119754)^5= | 0.434582108 | 0.434582108153817*526063= | $ 2,28,617.57 |
| NPV = Sum of all Discounted CF | $ 0.00 |
In the financial calculator, the inputs will be:
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