X Company currently buys 7,000 units of a part each year from a supplier for $8.

Question

X Company currently buys 7,000 units of a part each year from a supplier for $8.10 each, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for 6 years, at which time it will have zero disposal value X Company estimates that it will cost $29,010 a year to make the 7,000 units. What is the approximate rate of return if X Company makes the part instead of buying it from the supplier? Submit Answer Tries 0/5

Explanation / Answer

IRR = Lower Rate + NPV at lower rate/(NPV at lower rate- NPV at highter rate)*(difference of rate)

= 2% + 5104 +(4845-5104)*2%

= 3%

CALCULATION OF IRR NPV at 2% NPV at 4% Year Initial Cost Savings Net Cashflow Discounted Factor Discounted Cashflow Discounted Factor Discounted Cashflow a b c f g h=g*f i j=I*f 0       (150,000)     (150,000) 1.0000 (150,000) 1.0000 (150,000) 1          27,690          27,690 0.9804                 27,147 0.9615                 26,625 2          27,690          27,690 0.9612                 26,615 0.9246                 25,601 3          27,690          27,690 0.9423                 26,093 0.8890                 24,616 4          27,690          27,690 0.9238                 25,581 0.8548                 23,670 5          27,690          27,690 0.9057                 25,080 0.8219                 22,759 6          27,690          27,690 0.8880                 24,588 0.7903                 21,884 NPV 5,104 4,845)

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