Question

Gienuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash now analysis indicates the following:
Machine A Machine B Year Cash Flow Cash Flow o $2,000 -$2,000 832 832 832 832 0 2 0 0 4 3,877
What is the internal rate of return for each machine?

Answer 1

Answer:

18% and 24.01%

Explanation:

The computation of the internal rate of return for each machine is shown below:

Let us assume the Internal rate of return be X

And as we know that

The present value of cash inflows = present value of cash outflows

For Machine A

So,

$2,000 = $3877 ÷ 1.0x^4

So X = IRR = 18%

For Machine B

$2,000 = $832 ÷ 1.0x + $832 ÷ 1.0x^2 + $832 ÷ 1.0x^3 + $832 ÷ 1.0x^4

So X = IRR = 24.01%