Darrin Corporation is considering a proposal to purchase a new piece of equipment. The cost of the equipment is $16,611. The equipment is estimated to provide an annual cash flow of $3,000 for the next nine years. The company has a required rate of return of 15%. Calculate the internal rate of return (IRR), and interpret the results. Use the present value of an annuity table.
First find the present value factor The formula is Net Investment÷Annuity=PV Factor 16,611÷3,000=5.537
Pv factor is 5.537
Th e PV of an ordinary annuity table is examined to find the IRR. In the table, find the row representing the project’s life (in this case, nine periods) and find the PV factor resulting from the equation solution. In row 9, a factor of 5.537 appears under the column headed 11 percent. Thus, the internal rate of return for this investment is 11 percent.
Interpretation Since the IRR is lesser than the required rate of return, the proposal should be rejected 15% > 11%
