Machine A costs $9,500 and has an annual operating cost of $5,500. Machine B costs $8,000 and has an annual operating cost of $5. What is the annual rate of return the additional investment in machine A?

Complete Question:

Machine A costs $9,500 and has an annual operating cost of $5,500. Machine B costs $8,000 and has an annual operating cost of $5,800. Each machine has an economic life of 8 years. What is the annual rate of return the additional investment in machine A?

IRR is 11.81%

Explanation:

We have to find the annual rate of return on the additional investment in machine A. The additional investment can also be termed as incremental investment which is $1,500 ($9,500 - $8,000). Furthermore, the additional cost savings of operating machine A is $300 ($5,500 - $5,800). And this cost savings will be during the life span of the machine A.

Now

We can compute IRR, by using Excel as under:

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