Internal rate of return using interpolation
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Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $20,000. The annual cash inflow for the next three years will be:
Year cash flow
1 $10,000
2 9,000
3 6,500
a. Determine the internal rate of return using interpolation.
b. With a cost of capital of 12 percent, should the machine be purchased?
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The solution explains how to determine the internal rate of return using interpolation.
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a. Determine the internal rate of return using interpolation.
IRR is the rate at which the NPV=0. In the interpolation method, we find the NPV at different rates till we get one NPV as positive and one NPV as negative. This would imply that IRR would be in-between these rates since at IRR the NPV=0. We then interpolate to find the IRR.
We choose any ...
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