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General Accounting Discussions: Help calculating IRR

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  1.  
    • CommentAuthormattus
    • CommentTimeAug 6th 2008
     
    I need help calculating the IRR for the following question. Any help would be greatly appreciated!

    4. Machine A or Machine B

    • Annual Production in units 40,000
    • Cost of Machine A $38,000
    • Cost of Machine B $32,000
    • Unit Cost to Produce on Machine A $2.20
    • Unit Cost to Produce on Machine B $2.22
    • Useful Life 12 Years
    • CommentAuthorKirk Ward
    • CommentTimeAug 8th 2008 edited
     
    Mattus,

    Wouldn't you also need to know the revenue produced by each machine in order to get a rate of return?

    Boy, it's been a long time since I needed to know that.
    • CommentAuthorGie
    • CommentTimeAug 22nd 2008
     
    If you have access to a school library, check out the book Engineering Economy by DeGarmo. You can find valuable information about this subject. This is basically comparing alternatives using the IRR (internal rate of return method).
  4.  
    I'm reviewing for the CPA exam now and maybe IRR means different things in different disciplines.

    But as I understand it, the IRR is that rate at which the total of the discounted aftertax cashflows from an investment are exactly equal to the initial cash outlay for the machine, yielding a NPV of zero. A positive NPV doesn't tell you the IRR; all it does it tell you that management's required rate of return is covered by the investment and the project should be accepted.

    To get the IRR, I think you would need to know the revenues generated by the investment over its useful life - the aftertax cash inflows generated by the machines that, discounted back to the time of the cash outlay to buy the machines "year 0", would equal the cost of the machine. The discounted cash flows would that added up exactly to the purchase price of the machine (so that the NPV of the investment is 0) would indicate the IRR rate.

    But to get the IRR, I think you need some information as to the expected returns generated by whatever machine you're considering.

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