Question

The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $61,000 per year. The internal rate of return on the investment in the new machine is closest to (Ignore income taxes.):

Answer 1

Answer:

Internal Rate of Return (IRR) 9,00%

Explanation:

We use excel or a spreadsheet to calculate this ratio. See document attached.

We use a cash flow to solve this problem.

At moment 0 we have the investment cost , in this case  $365,695. From period 1 to period 9, we have incomes o benefits of $61,000. Then, we calculate the Net cash flow that is the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow to get the IRR.  

Download xlsx