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.

Question

Shane

Business

30 September, 12:37

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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Elsie Oneal · Answer 1

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%