Answer:
IRR = 16.5%
Explanation:
T<em>he IRR is the discount rate that equates the present value of cash inflows to that of cash outflows. At the IRR, the Net Present Value (NPV) of a project is equal to zero </em>
<em>If the IRR greater than the required rate of return , we accept the project for implementation </em>
<em>If the IRR is less than that the required rate , we reject the project for implementation </em>
IRR = a% + ( NPVa/(NPVa + NPVb)× (b-a)%
NPV = PV of annual savings - initial cost
PV of annual savings = A× (1- (1+r)^(-n) )/r
A- annual savings in operating cost , r- rate of return, n- number of years
NPVa at 10% discount rate
PV of cash inflow = (9,000× 1-1.1^-6)/0.1 = 39,197.35
NPV = 65,328.91 - 33,165 = 6,032.35
NPVb at 20% discount rate
PV of cash inflow = (9,000× 1-1.2^-6)/0.2= (3,235.41)
NPV = 29,929.59 -33,165 = (3,235.41)
IRR = a% + ( NPVa/(NPVa + NPVb)× (b-a)%
IRR = 10% + ( (6,032.35/(6,032.35 +3,235.41) )× (20-10)%= 16.51%
IRR = 16.5%
