Presentation Transcript
Slide 1:Example on the rate-of-return analysis
Example :Example Arabian Gulf Manufacturer is considering upgrading its plastic molding operation by installing computer-controlled machine.
The machine is expected to reduce recycle and produce better quality.
The capital cost of the machine is 10 million riyals and it is expected to bring the company a annual net profit of 1.8 million riyals.
The machine has a useful life of 8 years, after which it has a salvage value of 1 million riyals.
What is the IRR for this project?
Slide 3:The present worth is
PW(i) = -10 + 1.8 (P/A, i, 8) + 1 (P/F, i, 8)
Let the first estimate of IRR 8%:
PW(8%) = 0.88 >0 (IRR > 8%)
let the second estimate of IRR 12%:
PW(12%) = -0.65 <0 (IRR < 12%)
Slide 4:Using linear interpolation, we can write PW(i) as a function i in the range between 8% and 12%:
For PW = 0,
The IRR for the project is about 10.4%.