A clothing manufacturer anticipates that the market for a certain popular T-shir

Question

A clothing manufacturer anticipates that the market for a certain popular T-shirt will continue to be strong for a few years. The manufacturer, accordingly, is considering the purchase of equipment that would generate $100,000 in cash flow starting in 1 year and continuing for the next two consecutive years (for a total of three years). The machine itself costs $250,000 immediately, and initial expenses also include a one-time fee of $710 for a maintenance contract and $7,000 for setup and labor. What is the project's IRR?

Explanation / Answer

Initial Cash outflow = $250,000 + $710 + $7,000 = $257,710

Cash Inflows: Year 1 = $100,000

Year 2 = $100,000

Year 3 = $100,000

IRR is the rate at which the cash inflows is equal to the cash outflows.

$257,710 = $100,000/(1+r)^1 + $100,000/(1+r)^2 + $100,000/(1+r)^3

we will have to use hit and trial method to find out the IRR

IRR = 8% p.a

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