Garrison Appliances, Inc., is considering expanding its international presence. It sells 25% of all the toaster ovens sold in the United States, but only 3% of the toaster ovens sold outside of the United States. The company believes that it can sell more of its product if it has a production facility located overseas. Estimates concerning two possible locations, Mumbai and Bangalore, follow:

Possible Location	Mumbai	Bangalore
Initial cash outlay	$5,000,000	$2,800,000
Useful life	20 years	20 years
Net cash inflows excluding depreciation	$1,100,000	$860,000
The cost of capital	9%	9%
Tax rate	40%	40%

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Mumbai:

Years 1-20

	Net Income	Cash Flow
Annual cash savings	$1,100,000	+$1,100,000
Depreciation($5,000,000/20)	250,000
Income before tax	$850,000
Tax, 40%	340,000	-340,000
Net Income	$510,000
Annual Net cash flow		$760,000

Average rate of return on investment: Average Investment is (5,000,000) / 2 = $2,500,000 (net income) / $510,000= 20.40%

Payback period: 5,000,000 / 760,000 = 6.58 years

Net present value:

Year	Explanation	Amount Factor =	Present Value
0	Initial Investment	-$5,000,000 1	-$5,000,000
1-20	Annual net cash inflow	(Annual Net cash flow) 9.1285	6,937,660
	Net present value		$1,937,660

Profitability index: Present value of cash inflow / Present value of cash outflow = $6,937,660 / $5,000,000 = 1.39

Note the Present value of cash inflow is the Annual net cash inflow calculated in #3. Above.

Also, the Present value of cash outflow is the initial cash outlay.

QUESTION

What is the Internal Rate of Return?