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# 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?

#### Solution Preview

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 ...

#### Solution Summary

The solution explains how to determine the internal rate of return using interpolation.

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