Question

Reece Corporation is considering the purchase of a machine that would cost $24,388 and would have a useful life of 6 years. The machine would generate S5,600 of net annual cash inflows per year for each of the 6 years of its life. Using the information below, the internal rate of return on the machine would be closest to which of the following? Present Value of $1 10% 0.683 0.621 0.564 0.513 0.467 0.424 0.386 14% 0.592 0.519 0.456 0.400 0.351 0.308 0.270 Periods 8% 0.735 0.681 0.630 0.583 0.540 0.500 0.463 12% 0.636 0.567 0.507 0.452 0.404 0.361 0.322 10 Present Value of Annuity of $1 12% 3.037 3.605 14% 2.914 3.433 3.889 4.288 4.639 4.946 5.216 Periods 8% 3.312 3.993 4.623 5.206 5.747 6.247 6.710 10% 3.170 3.791 4.355 4.868 5.335 5.759 6.145 .564 4.968 5.328 5.650 10

Options are:

10%

12%

8%

6%

Please help me out

Answer 1

At IRR, NPV = 0

IRR = ra + [ NPVa * (rb - ra) / ( NPVa - NPVb)]

Where, ra = lower discount rate choosen

rb = higher discount rate choosen

NPVa = Net present value at ra

NPVb = Net present value at rb

As per computation in the attachment,

IRR = 8% + [ 1500.8 * (14%-8%) / (1500.8 - (-2609.6))]

= 8% + [ 1500.8 * 6% / (1500.8+2609.6)]

= 8% + [ 9004.8% / 4110.4]

= 8% + 2.19%

IRR = 10%

At IRR = 10%, NPV = 0.