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abruzzese [7]
3 years ago
15

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?
Business
1 answer:
sweet [91]3 years ago
6 0

Answer:

IRR = 43.51%

Explanation:

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

<em>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.</em>

<em>The IRR produces a Net present value(NPV) of zero.</em>

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%

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