Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $ 5.04 million per year.Your upfront setup costs to be ready to produce the part would be $ 8.01 million. Your discount rate for this contract is 7.6 %.What is the​ IRR?

Answer 1

Answer:

IRR = 43.51%

Explanation:

It is the discount rate that equates the present value of cash inflow to the present value of cash outflow from the same project.

The internal rate of return is the maximum cost of capital that can be used to appraise a project without cursing harm to the shareholders or investors.

The IRR produces a Net present value(NPV) of zero.

The IRR can be determined using the formula below:

IRR = IRR = a%   +  (NPVa/NPVa + NPV b)×  (b-a)%

a%- lower discount rate.

b% - Higer discount rate

NPVa- NPV using lower discount rate

NPVb- NPV using higher discount rate

We use 7.6% and 50% as trial discount rates as follows:

NPV at 7.6%

PV of inflow = (1- 1.076^(-3)/0.076 ) ×  5.04

NPV = (1- 1.076^(-3) ×  5.04 - 8.01  =5.0728 million

NPV at 50%

PV of inflow = (1- 1.50^(-3)/0.5) ×  5.04

NPV =(1- 1.50^(-3)/0.5) ×  5.04 -  8.01 =  -0.91666

IRR = a%   +  (NPVa/NPVa + NPV b)×  (b-a)%

     = 7.6% +  (5.0728/(5.0728 + 0.91666)) × (50-7.6)%

     = 43.51%

IRR = 43.51%