Sam Norton is CFO at Hammer & Tools Plc situated at Bridgewater in the county of Somerset in England. Everyday has to start with something and this morning Ann Woodland called him about an investment. Ann is head of operations and is in need of an eccentric press. This type of machinery is know to last for many years. The situation is rather straight forward; The investment amounts to 115 000 and is payable early during the first year. The cash flows from this machine is expected to be 25 000 for year 1 and 30 000 for year 2, 30 000 for year 3, 20 000 for year 4 and 10 000 from year 5 into perpetuity. The current press will be sold to a local vendor if the new press is bought for 5 000 but only paid in the end of the year. Cash flows are expected to be received in the end of each year. Sam knows that this type of investments has a bad reputation as they are difficult to defend from a financial perspective. However with a base required return of 10% and a risk premium of 5% he is willing to give it a try.

Now Ann has another question. It is about a very difficult task she got from a professor at the local university where she is studying a finance course. The question is as follows: Imagine an investment of 20 and then a cashflow of 6 payable at the end of each year during five years. What would then the internal rate of return be. This needs to be calculated not using functions provided by excel but manually. The investment is paid in the beginning of year 1 and cash flows are received in the end of each year. Then the professor has asked Ann to mention why the use of IRR may be in doubt. Help Sam to do the analysis of the two tasks and give your recommendation when it comes to the investment. (Show all steps)