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25 November, 18:25

Darrin Corporation is considering a proposal to purchase a new piece of equipment. The cost of the equipment is $16,611. The equipment is estimated to provide an annual cash flow of $3,000 for the next nine years. The company has a required rate of return of 15%. Calculate the internal rate of return (IRR), and interpret the results. Use the present value of an annuity table.

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  1. 25 November, 19:53
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    First find the present value factor

    The formula is

    Net Investment:Annuity=PV Factor

    16,611:3,000=5.537

    Pv factor is 5.537

    Th e PV of an ordinary annuity table is examined to find the IRR.

    In the table, find the row representing the project’s life (in this case, nine periods) and find

    the PV factor resulting from the equation solution. In row 9, a factor of 5.537 appears

    under the column headed 11 percent. Thus, the internal rate of return for this investment

    is 11 percent.

    Interpretation

    Since the IRR is lesser than the required rate of return, the proposal should be rejected 15% > 11%
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