Question

Internal Rate of Return Richins Company produces automobile engine parts. 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 $11,551,968 and will produce net cash savings of $1,800,000 per year. The system has a projected life of 10 years.Required:
Calculate the IRR for the new production system.

Answer 1

Answer:

IRR = 9%

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator:

Cash flow in year 0 = $-11,551,968 

Cash flow each year from year 1 to 10 = $1,800,000

IRR = 9%

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you