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Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $70,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,500 per year using the gang punch, but raw material costs would decrease $12,500 per year. MARR is 5%/year.What is the internal rate of return of this investment?

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Answer:

Explanation:

Internal rate of return (IRR ) is the rate at which the Net present value of a project equal to zero.

Depreciation per year = 70,000/15 = 4,666.67

Annual net cashflow = 12,500 -2,500 - 4,666.67 = 5,333.33

You can use financial calculator to solve for IRR with these inputs;

Initial investment; CF0 = -70,000

Recurring cashflows; C01 = 5,333.33

Frequency; F01 = 15

then use IRR function and key in CPT = 1.718%

Therefore, the Internal rate of return = 1.72%

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