Calculate the Internal Rate of Return of each of the following potential investments and recommend whether...

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Finance

Calculate the Internal Rate of Return of each of the followingpotential investments and recommend whether or not to include themin the upcoming capital budget given that the firm’s cost ofcapital is 14.5%.
New Software:
InitialCost                        $25,000
TrainingCost                   $12,000
Annual Cost Savings       $10,500
UsefulLife                       6 Years
Machine A or Machine B
Note: The key word here is “or”.One or the other machine must be bought. So, the analysis should bebased on the incremental cash flows resulting from the moreexpensive alternative.
Annual Production inunits                                  40,000
Cost of MachineA                                               $38,000
Cost of MachineB                                               $32,000
Unit Cost to Produce on MachineA                    $2.20
Unit Cost to Produce on MachineB                    $2.22
UsefulLife                                                           12 Years

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3.8 Ratings (703 Votes)

Calculation of IRR of the new softwareCost at the beginingInitial costTraining cost 37000Annual Savings 10000We can calculate IRR by using Present value of annuityformulaPresent value of annuityAnuity PV factor of annuityr rate of interest for 6 years37000 PV factor10000PV factor 370001000037Find 37 in 6th See Answer

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Calculate the Internal Rate of Return of each of the followingpotential investments and recommend whether or not to include themin the upcoming capital budget given that the firm’s cost ofcapital is 14.5%.New Software:InitialCost $25,000TrainingCost $12,000Annual Cost Savings $10,500UsefulLife 6 YearsMachine A or Machine BNote: The key word here is “or”.One or the other machine must be bought. So, the analysis should bebased on the incremental cash flows resulting from the moreexpensive alternative.Annual Production inunits 40,000Cost of MachineA $38,000Cost of MachineB $32,000Unit Cost to Produce on MachineA $2.20Unit Cost to Produce on MachineB $2.22UsefulLife 12 Years