Concepts Introduction: Internal rate of return : It is one of the marked down income strategies. Inner rate of return is the financing cost that will cause the present estimation of the normal capital consumption to level with the present estimation of the foreseen net yearly money streams. It implies net present esteem equivalent to zero since, it perceives the time estimation of cash. Net present value : It is one of the marked down income systems; it includes reducing net income to their present esteem and after that coordinating that present an incentive with the capital consumption required by the speculation. The distinction between these two sums is net present esteem. Just, net Present Value is the contrast between the present esteem o money inflows and starting speculation. The net present value can be expressed in terms of a formula: Net present value = present cash inflows – present cash outflows To determine: Internal rate of return Solution: Calculate the net present value as shown below: Now 1 2 3 4 5 Purchase of machine (-$137,280) Annual cash flows $40,000 $40,000 $40,000 $40,000 $40,000 Total cash flows (-$137,280) $40,000 $40,000 $40,000 $40,000 $40,000 Discount factor (14%) 1 0.8772 0.7695 0.675 0.5921 0.5194 Present value (-$137,280) $35,088 $30,779 $26,999 $23,683 $20,775 Net present value $44 Therefore the net present value is $44. Calculate the internal rate of return as shown below: Year Cash Flows ($) 0 -1,37,280 1 37,150 2 37,150 3 37,150 4 37,150 5 37,150 A R R / S R R = Average Profit After Tax Net Initial Investment = 40000 5 137320 2 = 11 % Therefore the internal rate of return is 11%

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Chapter 13 Solutions