Question

A small company that specializes in powder coating expanded its building and purchased a new oven that is large enough to handle automobile frames. The building and oven cost $175,000, but new business from hot-rodders has increased annual income by $520,000. If operating expenses for gas, materials, labor, etc., amount to $470,000 per year, what rate of return will be made on the investment if only the cash flows that occur over the next 4 years are included in the calculation

Answer 1

Answer:

rate 0.= 5.63%

Explanation:

F0 = -175,000 (oven cost)

Then

520,000 additional revenues

-470,000 additional expenses

  50,000 net cash flow

We ghave to solve for the rate of return of a 50,000 dollar annuity given it cost 170,000 during four years

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 50,000.00

time 4

PV $175,000.0000

$50000 \times \frac{1-(1+r)^{-4} }{r} = PV$

We apply the IRR function in excel to get the IRR

=IRR({-175000,50000,50000,50000,50000})

rate 0.055637846 = 5.63%