I am having trouble with this problem. I have included the reference tables that

Question

I am having trouble with this problem. I have included the reference tables that we are required to use. I will also include notes from the book. There may be many ways to figure out the answers but the book requires us to use their methods. One tutor has tried to help me prior but they were unsuccessful. I am using the textbook: Kimmel, Accounting: Tools for Decision Making, 5e. This is a problem from Chapter 24 Planning Capital Investments. It is E24-6. Please note the text in red. It is asking to calculate the internal rate of return. I have already calculated the cash payback period.

Question:

Notes:

Reference Tables:

Explanation / Answer

Internal Rate of Return

Calculating NPV of the Project @ 10% discounting Rate

Present Value of Cash Inflows = [Savings in Operating Cost per year - Incremental Depreciation] x Cumulative PVF @ 10% for 6 Years

= [7000 - ( 31500/6 - 1900/5)] x  4.35526

= $9277

NPV = Present Value of Cash inflows - Present Value of Cash outflows

= 9277 - (30400+1100-1900)

= -$20323

Calculating NPV of the Project @ 4% discounting Rate

Present Value of Cash Inflows = [Savings in Operating Cost per year - Incremental Depreciation] x Cumulative PVF @ 4% for 6 Years

= [7000 - (31500/6 - 1900/5)] x 5.24214

= $11165

NPV = Present Value of Cash inflows - Present Value of Cash outflows

= 11165 - (30400+1100-1900)

= -$18435

Internal Rate of Return = Lower rate + [Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] x Difference in rates

= 4 + [-18435 / (-18435 + 20323) ] x 6

= 4 - 2.85

= 1.15%

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