Homework Answers
a. Simple payback period = initial cost / annual savings = 229000 / 41000 = 5.585 yrs = 5.6 yrs
b. Let IRR be i%, then
229000 = 41000 * (P/A, i%, 22)
(P/A, i%, 22) = 229000 / 41000 = 5.585366
Using trail and error method
When i = 10%, (P/A, i%, 22) = 8.771540
When i = 15%, (P/A, i%, 22) = 6.358663
When i = 18%, (P/A, i%, 22) = 5.409901
When i = 17%, (P/A, i%, 22) = 5.696375
Using interpolation
i = 17% + (5.696375 - 5.585366) / (5.696375 - 5.409901) *(18% - 17%)
i = 17% + 0.3875%
i = 17.39%
As payback period is more than 3 yrs, this investment should be rejected
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