X Company currently buys 6,000 units of a part each year from a supplier for $7.

Question

X Company currently buys 6,000 units of a part each year from a supplier for $7.60 each, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for 6 years, at which time it will have zero disposal value. X Company estimates that it will cost $16,050 a year to make the 6,000 units What is the approximate rate of return if X Company makes the part instead of buying it from the supplier? s Submit Answer Incorrect. Tries 2/5 Previous Tries

Explanation / Answer

IRR = Lower Rate + NPV at lower rate/(NPV at lower rate- NPV at higher rate)*(difference of rate)

= 4% +4905/(4693-4905)*2%

=5%

Calculation OF IRR NPV at 4% NPV at 6% Year Initial Cost Savings Net Cashflow Discounted Factor Discounted Cashflow Discounted Factor Discounted Cashflow a b c f g h=g*f i j=I*f 0       (150,000)     (150,000) 1.0000             (150,000) 1.0000             (150,000) 1          29,550          29,550 0.9615                 28,413 0.9434                 27,877 2          29,550          29,550 0.9246                 27,321 0.8900                 26,299 3          29,550          29,550 0.8890                 26,270 0.8396                 24,811 4          29,550          29,550 0.8548                 25,259 0.7921                 23,406 5          29,550          29,550 0.8219                 24,288 0.7473                 22,081 6          29,550          29,550 0.7903                 23,354 0.7050                 20,832 NPV 4,905 (4,693)

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