Merton Manufacturing Company has an opportunity to purchase

Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,280,000 per year. The cost of the equipment is $7,865,045.76. Merton expects it to have a 10-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 9 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) .

Calculate the internal rate of return of the investment opportunity.

Solution

IRR is the point where PVCI = PVCO.

Where PVCO = 7865045.76

By hit and trail method, we have come to find out that at 10%PVF for 10 yrs of operating savings come to:

=$7865045.76

So, 10% is the discount rate at which PVCI = PVCO

Hence, IRR is 10%