Question

Internal Rate of Return Lisun Company produces a variety of gardening tools and aids. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of $4,607,200 and will produce net cash savings of $800,000 per year. The system has a projected life of 9 years. Required: Calculate the IRR for the new production system. For discount factors use Exhibit 12B-2. Round your answer to the nearest whole percentage. %

Answer 1

Answer:

Internal Rate of Return is 10%

Explanation:

The question is asking for the Internal Rate of Return for Lisun Company's new Production system.

What should be calculated at this point is the Present Value for the Internal Rate of Return

= Cost of Investment/ The Net Cash Savings per year

Cash Investment= $4, 607,200

Net Cash Savings: $800,000

The PV of IRR = $4,607,200/ $800,000

= 5.759

Since, the PV factor is 5.759, we need to look up the Present Value and Future Value table. Checking the 9 year column, the 5.759 is related to the discount rate of 10%.

Therefore, Internal Rate of Return is 10%