Internal Rate of Return Randel Company produces a variety of gardening took and

Question

Internal Rate of Return Randel Company produces a variety of gardening took and aids. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of $3,455,400 and will produce net cash savings of $600,000 per year. The system has a projected life of 9 years. Calculate the IRR for the new production system. For discount factors use Exhibit HB-2. Round your answer to the nearest whole percentage.

Explanation / Answer

Yearly Cash Savings = 600000

Cash Outflow = 3455400

Time = 9 years

We know that : Cash Inflow * PVIFA ( 9 years , x%) = 3455400 where x is the IRR of the project at which NPV = 0

So PVIFA ( 9 years , x%) = 3455400 / 600000 = 5.759

Looking up at the PVIFA table in 9 year column we find that 5.759 corresponds to 10% discount rate

Hence IRR = 10%

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