Question

Crockin Corporation is considering a machine that will save $9,000 a year in cash operating costs each year for the next six years. At the end of six years it would have no salvage value. If this machine costs $33,165 now, the machine's internal rate of return is closest to (Ignore income taxes.):

Answer 1

Answer:

rate = 16%

Explanation:

We need to understand that IRR is the one which makes the NPV equal to zero

In this case we have an annuity of 9,000 for 6 year

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C  9,000.00

time  6.00

rate  IRR

$9000 \times \frac{1-(1+IRR)^{-6} }{tir} = PV$

At the Pv will equal the invesment so:

$9000 \times \frac{1-(1+IRR)^{-6} }{tir} = 33,165$

we can look for the annuity factor in hthe table to look for the closed one

33165 / 9000 = 3.685

we can look into the table for values of n = 6 which is the closed.

And then start doing trial and error until find it.

For this particular case, hit the IRR just by looking at the table.

for n = 9 and rate = 16% factor = 3.685

This value is the factor of our annuity, so this is the rate.