Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.76 million and create incremental cash flows of $543,457.00 each year for the next five years. The cost of capital is 8.80%. What is the internal rate of return for the J-Mix 2000?

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

Initial investment = Annuity * [1 - 1 / (1 + r)ⁿ] /r

1,760,000 = 543,457 * [1 - 1 / (1 + R)⁵] /R

Using trial and error method, i.e., after trying various values for R, lets try R as 16.47%

1,760,000 = 543,457 * [1 - 1 / (1 + 0.1647)⁵] /0.1647

1,760,000 = 543,457 * [1 - 0.466584]/ 0.1647

1,760,000 = 543,457 * 3.238714

1,760,000 = 1,760,000

Therefore, internal rate of return is 16.47%