Machine A costs $9,500 and has an annual operating cost of $5,500. Machine B costs $8,000 and has an annual operating cost of $5
. What is the annual rate of return the additional investment in machine A?
1 answer:
Complete Question:
Machine A costs $9,500 and has an annual operating cost of $5,500. Machine B costs $8,000 and has an annual operating cost of $5,800. Each machine has an economic life of 8 years. What is the annual rate of return the additional investment in machine A?
Answer:
IRR is 11.81%
Explanation:
<u><em>We have to find the annual rate of return on the additional investment in machine A.</em></u> The additional investment can also be termed as incremental investment which is $1,500 ($9,500 - $8,000). Furthermore, the additional cost savings of operating machine A is $300 ($5,500 - $5,800). And this cost savings will be during the life span of the machine A.
Now
We can compute IRR, by using Excel as under:
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Answer:
(i) $133.12
(ii) $297.6
(iii) $300.8
(iv) $301.6
Explanation:
From the compounding formula;
Future value = Present value
where r is the rate, m is the number of payment per year, and n is the number of years.
Interest = future value - present value
Given that present value = $800, r = 8%, n = 4 years.
(i) annually,
m = 1, so that;
Future value = 800
= $933.12
Interest = $933.12 - $800
= $133.12
(ii) quarterly,
m = 3, so that;
Future value = 800
= 800(1.372)
= $1097.6
Interest = $1097.6 - $800
= $297.6
(iii) monthly,
m = 12, so that;
Future value = 800
= 800(1.376)
= $1100.8
Interest = $1100.8 - $800
= $300.8
(iv) weekly,
m = 54, so that;
Future value = 800
= 800(1.377)
= $1101.6
Interest = $1101.6 - $800
= $301.6