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13 July, 11:00

Gienuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash now analysis indicates the following:

Machine A Machine B Year Cash Flow Cash Flow o $2,000 - $2,000 832 832 832 832 0 2 0 0 4 3,877

What is the internal rate of return for each machine?

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  1. 13 July, 11:11
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    18% and 24.01%

    Explanation:

    The computation of the internal rate of return for each machine is shown below:

    Let us assume the Internal rate of return be X

    And as we know that

    The present value of cash inflows = present value of cash outflows

    For Machine A

    So,

    $2,000 = $3877 : 1.0x^4

    So X = IRR = 18%

    For Machine B

    $2,000 = $832 : 1.0x + $832 : 1.0x^2 + $832 : 1.0x^3 + $832 : 1.0x^4

    So X = IRR = 24.01%
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