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Selection of a machine through IRR.

The following machines are mutually exclusive.You may select only one. 

Machine A will cost $150,000, save the company $40,000 per year for 5 years and can be sold for an additional $20,000 at the end of 5 years.  At your firm's 10% cost of capital, it has a Net Present Value of $14,050.  Its IRR (or ROI) is 13.4%.

Machine B will cost $190,000, save the company $50,000 per year for 5 years, and have a salvage value of $25,000.  At your firm's 10% cost of capital, it has a Net Present Value of $15,062. Its IRR (or ROI) is 12.9%.

a. Which one would you choose?

b. Explain what is meant by the term,Internal Rate of Return.

PRESENT VALUE OF A SINGLE PAYMENT

(Payment to be received in the future)

Year

8%

9%

10%

11%

12%

13%

14%

15%

1

0.9259

0.9174

0.9091

0.9009

0.8929

0.8850

0.8772

0.8696

2

0.8573

0.8417

0.8264

0.8116

0.7972

0.7831

0.7695

0.7561

3

0.7938

0.7722

0.7513

0.7312

0.7118

0.6931

0.6750

0.6575

4

0.7350

0.7084

0.6830

0.6587

0.6355

0.6133

0.5921

0.5718

5

0.6806

0.6499

0.6209

0.5935

0.5674

0.5428

0.5194

0.4972

6

0.6302

0.5963

0.5645

0.5346

0.5066

0.4803

0.4556

0.4323

7

0.5835

0.5470

0.5132

0.4817

0.4523

0.4251

0.3996

0.3759

8

0.5403

0.5019

0.4665

0.4339

0.4039

0.3762

0.3506

0.3269

9

0.5002

0.4604

0.4241

0.3909

0.3606

0.3329

0.3075

0.2843

10

0.4632

0.4224

0.3855

0.3522

0.3220

0.2946

0.2697

0.2472

11

0.4289

0.3875

0.3505

0.3173

0.2875

0.2607

0.2366

0.2149

12

0.3971

0.3555

0.3186

0.2858

0.2567

0.2307

0.2076

0.1869

13

0.3677

0.3262

0.2897

0.2575

0.2292

0.2042

0.1821

0.1625

14

0.3405

0.2992

0.2633

0.2320

0.2046

0.1807

0.1597

0.1413

15

0.3152

0.2745

0.2394

0.2090

0.1827

0.1599

0.1401

0.1229

16

0.2919

0.2519

0.2176

0.1883

0.1631

0.1415

0.1229

0.1069

17

0.2703

0.2311

0.1978

0.1696

0.1456

0.1252

0.1078

0.0929

18

0.2502

0.2120

0.1799

0.1528

0.1300

0.1108

0.0946

0.0808

19

0.2317

0.1945

0.1635

0.1377

0.1161

0.0981

0.0829

0.0703

20

0.2145

0.1784

0.1486

0.1240

0.1037

0.0868

0.0728

0.0611

PRESENT VALUE OF AN ORDINARY ANNUITY

(Payments at the end of each year)

Year

8%

9%

10%

11%

12%

13%

14%

15%









1

0.9259

0.9174

0.9091

0.9009

0.8929

0.8850

0.8772

0.8696

2

1.7833

1.7591

1.7355

1.7125

1.6901

1.6681

1.6467

1.6257

3

2.5771

2.5313

2.4869

2.4437

2.4018

2.3612

2.3216

2.2832

4

3.3121

3.2397

3.1699

3.1024

3.0373

2.9745

2.9137

2.8550

5

3.9927

3.8897

3.7908

3.6959

3.6048

3.5172

3.4331

3.3522

6

4.6229

4.4859

4.3553

4.2305

4.1114

3.9975

3.8887

3.7845

7

5.2064

5.0330

4.8684

4.7122

4.5638

4.4226

4.2883

4.1604

8

5.7466

5.5348

5.3349

5.1461

4.9676

4.7988

4.6389

4.4873

9

6.2469

5.9952

5.7590

5.5370

5.3282

5.1317

4.9464

4.7716

10

6.7101

6.4177

6.1446

5.8892

5.6502

5.4262

5.2161

5.0188

11

7.1390

6.8052

6.4951

6.2065

5.9377

5.6869

5.4527

5.2337

12

7.5361

7.1607

6.8137

6.4924

6.1944

5.9176

5.6603

5.4206

13

7.9038

7.4869

7.1034

6.7499

6.4235

6.1218

5.8424

5.5831

14

8.2442

7.7862

7.3667

6.9819

6.6282

6.3025

6.0021

5.7245

15

8.5595

8.0607

7.6061

7.1909

6.8109

6.4624

6.1422

5.8474

16

8.8514

8.3126

7.8237

7.3792

6.9740

6.6039

6.2651

5.9542

17

9.1216

8.5436

8.0216

7.5488

7.1196

6.7291

6.3729

6.0472

18

9.3719

8.7556

8.2014

7.7016

7.2497

6.8399

6.4674

6.1280

19

9.6036

8.9501

8.3649

7.8393

7.3658

6.9380

6.5504

6.1982

20

9.8181

9.1285

8.5136

7.9633

7.4694

7.0248

6.6231

6.2593

 

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M9162643

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