Question

A company is investing in a solar panel system to reduce its electricity costs. The system requires a cash payment of \(125,374.60 today. The system is expected to generate net cash flows of \)13,000 per year for the next 35 years. The investment has zero salvage value. Compute the internal rate of return on this investment.

Short answer

The internal rate of return of solar panel systems is 10%

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of salvage value

The salvage value is defined as the value of an asset that is computed after deducting all the depreciation.

Computation of internal rate of return

$$\begin{gathered} \mathbf{Present}\mathbf{}\mathbf{value}\mathbf{}\mathbf{factor}\mathbf{=}\frac{\mathrm{Initial}\mathrm{investment}}{\mathrm{Cash}\mathrm{flow}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{125,347}{13,000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{9}\mathbf{.}\mathbf{64415} \end{gathered}$$

The IRR at the present value factor of 9.64415 will be 10%