# Internal rate of return using interpolation

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?

https://brainmass.com/business/internal-rate-of-return/internal-rate-return-using-interpolation-267424

#### 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.