Scribd
Upload
19 views4 pages

Chapter 12 IRR

The document provides calculations for the internal rate of return (IRR) for three different investment scenarios. The first investment yields an IRR of 11%, the second yields 7%, and the third yields 16.23%. The analysis helps determine whether each investment should be undertaken based on the calculated IRRs compared to the cost of capital.

Uploaded by

abusaad.cpa3
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
19 views4 pages

Chapter 12 IRR

The document provides calculations for the internal rate of return (IRR) for three different investment scenarios. The first investment yields an IRR of 11%, the second yields 7%, and the third yields 16.23%. The analysis helps determine whether each investment should be undertaken based on the calculated IRRs compared to the cost of capital.

Uploaded by

abusaad.cpa3
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

1.

You buy a new piece of equipment for $16,230, and you receive a cash inflow of $2,500 per
year for 12 years. What is the internal rate of return?

Calculator Solution:

Using a financial calculator,

Press the following keys: 2nd, CF, 2nd, Clear.

Calculator displays CFo, 16,230 +|– key, press the Enter key.

Press down arrow, enter 2,500, and press Enter.

Press down arrow, enter 12, and press Enter.

Press IRR; calculator shows IRR = 0.00.

Press CPT; calculator shows IRR = 11.

Answer: IRR = 11%


2. King’s Department Store is contemplating the purchase of a new machine at a cost of $22,802.
The machine will provide $3,500 per year in cash flow for nine years. King’s has a cost of capital
of 10 percent. Using the internal rate of return method, evaluate this project and indicate
whether it should be undertaken.

Calculator Solution:

Using a financial calculator,

Press the following keys: 2nd, CF, 2nd, CLR WORK.

Calculator displays CFo, 22,802 +|– key, press the Enter key.

Press down arrow, enter 3,500, and press Enter.

Press down arrow, enter 9, and press Enter.

Press IRR; calculator shows IRR = 0.00.

Press CPT; calculator shows IRR = 7.

Answer: IRR = 7%
3. Home Security Systems is analyzing the purchase of manufacturing equipment that will cost
$50,000. The annual cash inflows for the next three years will be:

Year 1 $25,000

Year 2 23,000

Year 3 18,000

Determine the internal rate of return. With a cost of capital of 18 percent, should the machine be
purchased?
Calculator Solution:

Alternatively, use a financial calculator as follows to obtain the correct answer rather than an
approximation.

Press the following keys: 2nd, CF, 2nd, Clear.

Calculator displays CFo, 50,000 +|– key, press Enter.

Press down arrow, enter 25,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 23,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 18,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press IRR; calculator shows IRR = 0.00.

Press CPT; calculator shows IRR = 16.23.

Answer: IRR = 16.23%

You might also like