INTERNAL RATE OF RETURN (Even Cash Flows)Background: What does the IRR method provide?Action Plan: What is the formula for the internal rate of return? What else must be done to determinethe IRR?

1. First, the present value of an annuity factor (PVA) must be calculated: PVA factor = Net initial investment (Cost salvage value of old asset)/ annual cash flow2. Then, the PVA factor must be looked up in the table using the life of the investment. Find the

column that the factor is in, that is the IRR.

Solve: Decker Company can purchase a new machine at a cost of $104,320 that will save $20,000 peryear in cash operating costs. The machine will have a 10-year life; the company's cost of capital(discount rate) is 12%. What is the machine's IRR? Evaluate: What does the answer mean? Is the project acceptable? Why?