Merton Manufacturing Company has an opportunity to purchase some technologically
ID: 2491706 • Letter: M
Question
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.
Explanation / Answer
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%