Share
Explore BrainMass

Calculating IRR in the given case

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.

Solution Preview

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 ...

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.

$2.19