Question

What is the IRR for a machine over a 6-year project life with the following details:

	Machine C
Initial cost	$85,000
Life in years	2
Salvage after life	20%
Benefits 1st year	$95,000
Costs 1st year	$58,000
Benefit increase per year	4.50%
Inflation	2.50%
All costs and benefits keep increasing every year even when a new machine is bought.

		10.7%
		11.3%
		12.9%
		14.4%

Answer 1

Option B

1. Cost of Machine in Year 2 = Initial Cost * (1 + Inflation)^ Year - Salvgae value of machine purchased in year 0

Cost of Machine in Year 2 = $85000 * (1 + 0.025)^ 2 - $85000 * 20%

Cost of Machine in Year 2 = $72303.13

2. Cost of Machine in Year 4 = Initial Cost * (1 + Inflation)^ Year - Salvage value of machine purchased in year 2

Cost of Machine in Year 2 = $85000 * (1 + 0.025)^ 4 - $89303.13 * 20%

Cost of Machine in Year 2 = $7596.3.14

3. Salvage value in Year Six = Cost of Machine purchased in year 4 * salvage

Salvage value in Year Six = $93824.1 * 20% = $18764.82

4. Annual Benefits (Formula = Present Benefits * (1 + 0.045)^year

5. Annual Cost = (Formula = Presnet cost * ( 1 + 0.025)^ year