Question

Birdies and Eagles Inc. is analyzing the purchase of a new machine costing $155,000. The company...

Birdies and Eagles Inc. is analyzing the purchase of a new machine costing $155,000. The
company expects to realize net savings of $30,000 per year for the next 7 years. What is
BEI's internal rate of return (IRR) on this investment?
Select one:
A. 6.72%
B. 7.32%
C. 8.22%
D. 9.52%

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Homework Answers

Answer #2

THE ANSWER IS “C. 8.22%”

Step – 1, Firstly calculate NPV at Say 8%

Net Present Value [NPV] = Present Value of Annual cash flows – Initial Investment

= $30,000[PVIFA 8%, 7 Years] - $155,000

= [$30,000 x 5.206370] - $155,000

= $1,191

Step – 2, NPV at 8% is positive, Calculate the NPV again at a higher rate, Say 9%

= $30,000[PVIFA 9%, 7 Years] - $155,000

= [$30,000 x 5.032952] - $155,000

= -$4,011

Therefore IRR = R1 + NPV1(R2-R1)

                                   NPV1-NPV2

= 8% + $1,191 (9% - 8%)

             $1,191 - (-4,011)

IRR = 8% + 0.22%

IRR = 8.22%

“HENCE, THE ANSWER is 8.22%”

answered by: anonymous
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