Question

A builder is considering purchasing a machine costing $90,000, which will save labour costs of $25,000 a year. The annual operating cost of the machine is $10,000. The estimated economic life of the machine is 10 years, when the salvage value is expected to be $10,000. What is the rate of return of this laboursaving device

Answer 1

Answer:

11.47%

Explanation:

initial outlay = -$90,000

cash flows years 1 - 9 = $25,000 - $10,000 = $15,000

cash flow year 10 = $25,000 - $10,000 + $10,000 = $25,000

using a financial calculator. IRR = 11.47%

The internal rate of return (IRR) is the discount rate at which a project's NPV = 0, i.e. it is break even interest rate of a project. If the desired discount rate is higher, then the NPV will be negative, if the desired discount rate is lower, then the NPV will be positive.