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A company projects an increase in net income of $193500 each year for the next five years if it invests $900000 in new equipment. The equipment has a 5-year life and an estimated salvage value of $300000. What is the annual rate of return on this investment?

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cecylya

Answer:

The Internal Rate of Return (IRR) 10,74%

Explanation:

We use excel or a spreadsheet to calculate this ratio. See document attached.

We use a cash flow to solve this problem.

At moment 0 we have the investment cost , in this case $900000. From period 1 to period 5, we have incomes o benefits of $1935000.

At period 5 we have to consider the estimated salvage value of $300000.

Then, we calculate the Net cash flow that is the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow to get the IRR.  

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