Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.92 million and create incremental cash flows of $580,127.00 each year for the next five years. The cost of capital is 9.52%. What is the internal rate of return for the J-Mix 2000?

15.54 %

Explanation:

The Internal Rate of Return (IRR) is the Interest rate that will make the present value of Cash Flows equal to the price or initial investment.

Step 1

First determine the summary of Cash Flow of the project.

The Projects` cash flows are as follows :

Year 0 = $1,920,000

Year 1 = $580,127.00

Year 2 = $580,127.00

Year 3 = $580,127.00

Year 4 = $580,127.00

Year 5 = $580,127.00

Step 2

Calculate the IRR.

From this point i will use a Financial Calculator. The Function to use is the CFj for uneven Cash Flows.

($1,920,000)            CFj

$580,127.00            CFj

$580,127.00            CFj

$580,127.00            CFj

$580,127.00            CFj

$580,127.00            CFj

Shift IRR/YR      15.5415 or 15.54 %

Conclusion :

The internal rate of return for the J-Mix 2000 is 15.54 %