Question

7. A company invests AED 110,000 in a project with a lifetime of 35 years. The project gives an annual income of AED 12,000. The yearly maintenance costs are AED 3,500 and the salvage value for the project after 35 years is AED 20,500. There is a single extra cost at the end of ten years of AED 20,800 for renovation of the project. Calculate the Internal Rate of Return for the project. Use interest rate values of 5 and 7 percent and interpolate the IRR linearly.

Answer 1

For IRR we set the cash flow

NPV = -110000 + (12000 - 3500)(P/A, i%, 35) + 20500(P/F, i%, 35) - 20800(P/F, i%, 10) = 0

At i = 5%, we have NPV = 12200.817 and at i = 7% NPV = -18679.654

Find IRR = 5% + (7% - 5%)*(12996.83/(12996.83 + 18679.654))

= 5.8%

This implies that IRR on this investment is 5.8%