Let’s say, you’re deciding whether to buy a machine to perform a particular task.
Before buying this particular machine, it’s better for you to calculate if it will be a profitable decision by running it through an IRR computation.
The machine you’re planning to buy costs $7,000. You estimate the machine to last 9 years, generating more or less $2,500 in revenue annually. In the 10th year, you’re planning to sell the machine for its scrap value of $1,500.
For this example, let’s just say that a worthwhile investment should have an IRR higher than 17%.
So in this scenario, 18% and above IRR will be an excellent investment.
To calculate the IRR, simply input the formula and provide the appropriate parameters:
For this scenario, buying a $7000-machine will yield profitable years for your business.