Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $40,000. The annual cash inflows for the next three years will be:

Year

1 .................... 2 .................... 3 ....................

Cash Flow

$20,000 18,000 13,000

Determine the internal rate of return using interpolation. With a cost of capital of 12 percent, should the machine be purchased?

Please calculate the present value at 14% for year 1, 2, and 3

Example to fill in:

STEP 1:	Average the inflows
	$17,000
STEP 2:	Divide investment by annuity from step 1
	2.353
STEP 3:	Find the rate that corresponds to the value in Step 2:
STEP 4:	Calculate the Present Value at 14%
	Because the inflows are biased toward the early years, we will use the higher rate of 14%.
Year	Cash Flow	PVIF @ 14%	Present Value
1	$20,000
2	$18,000
3	$13,000
STEP 5:	Calculate the Present Value at 15%
	Since the NPV is slightly over $40,000, we need to try a higher rate. We will try 15%.
Year	Cash Flow	PVIF @ 15%	Present Value
1	$20,000	0.870	$17,391
2	$18,000	0.756	$13,611
3	$13,000	0.658	$8,548
			($450)
		PV @ 14%
	($450)	PV @ 15%
		PV @ 14%
		Cost
IRR =