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Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5-year period,...

Question:

Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5-year period, the costs associated with one product line were as follows: first cost of $22,000, and annual costs of $19,000. Annual revenue was $26,000 and the used equipment was salvaged for $6,000. What rate of return did the company make on this product?

Internal rate of return

Internal rate of return is used to evaluate long term projects involving considerable investment. Though it is a good measure it has some drawbacks too like it doesn't consider reinvestment opportunities and risks. And it doesn't work for irregular patterns of cash flows.

Answer and Explanation: 1

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The internal rate of return of a project is given by

PV of inflows = intial outlay

Where

Annual Inflows =$26000 -$19000 =$7000 p.a.

Its PV =...

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Internal Rate of Return: Advantages & Disadvantages

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Chapter 9 / Lesson 5
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This lesson defines and explains the use of the internal rate of return. The lesson also explains the advantages and disadvantages of the internal rate of return.


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