Calculating IRR in the given case
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Joel Hodge, CFO of Kleiser Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $600,000 per year. The equipment costs $1,794,367.20. It is expected to have a five-year useful life and a zero salvage value. Kleiser's cost of capital is 18 percent.
Required
a. Calculate the internal rate of return of the investment opportunity.
b. Indicate whether Kleiser should purchase the equipment.
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Solution Summary
Solution describes the steps to calculate IRR in the given case. IRR is calculated by using MS Excel functions as well as annuity tables.
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a. Calculate the internal rate of return of the investment opportunity.
Method 1
Cost of equipment=$1,794,367.20
Increase in net cash flow=$600,000
Useful life=5 years
Year End Cash Flow
0 -1794367.2
1 600000
2 ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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