Question

Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $122,570, Including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $34,000 per year. The machine would have a five-year useful life and no salvage value Click here to view Exhibit.138-1 and Exhibit 138.2. to determine the appropriate discount factor(s) using table Required: 1. What is the machine's internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.) 2. Using a discount rate of 12% , what is the machine's net present value? Interpret your results 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $31,505 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place ie. 0.123 should be considered as 12%.) 1 Internal rate of return Net present value Internal rate of return 2. 3.

Answer 1

1 Internal rate of return Year Cost of Machine $1,22,570.00 $0.00 $0.00 $0.00 $0.00 Cash Inflows $0.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 IRR Net Cash Flows $1,22,570.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 12% $0.00 2 Net Present Value Net Cash Flows PV $1 @12% Cost of Machine -$1,22,570.00 $0.00 $0.00 $0.00 $0.00 $0.00 Cash Inflows $0.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 $1,22,570.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 $34,000.00 Net Present Value 0.893 0.797 0.712 0.636 0.567 Present value of Cash Flows $1,22,570.00 $30,362.00 $27,098.00 $24, 208.00 $21,624.00 $19,278.00 Interpretation The NPV of the project is $0.00 Hence this results in indifference as it would not result in either profit or loss

3 Internal Rate of Return Year Cost of Machine -$1,22,570.00 $0.00 $0.00 $0.00 $0.00 $0.00 Cash Inflows $0.00 $31,505.00 $31,505.00 $31,505.00 $31,505.00 $31,505.00 IRR Net Cash Flows $1,22,570.00 $31,505.00 $31,505.00 $31,505.00 $31,505.00 $31,505.00 9%

2 1 1 Internal rate of return Year Cost of Machine Cash Inflows Net Cash Flows 30 -122570 =B3+C3 4 1 34000 =B4+C4 5 2 34000 =B5+C5 34000 =B6+C6 34000 =B7+C7 34000 =B8+C8 IRR =IRR(D3:08)

F 12 2 Net Present Value 13 Cost of Present value of Year Cash Inflows Net Cash Flows PV $1 @12% 14 Machine Cash Flows 15 0 -122570 =B15+C15 =E15*D15 16 1 34000 =B16+C16 0.893 =E16*D16 17 2 34000 =B17+C17 0.797 =E17*D17 18 3 34000 =B18+C18 0.712 =E18*D18 19 4 34000 =B19+C19 0.636 =E19*D19 20 5 34000 =B20+C20 0.567 =E20*D20 Net Present Valu =SUM(F15:F20) 22 23 Interpretation 24 25 The NPV of the project is $0.00 Hence this results in indifference as it would not result in either profit or loss 21

28 29 3 Internal Rate of Return 30 Year Cost of Machine Cash Inflows Net Cash Flows 31 0 -122570 =B31+C31 32 1 31505 =B32+C32 33 2 31505 =B33+C33 34 3 31505 =B34+C34 31505 =B35+C35 31505 =B36+C36 IRR =IRR(D31:D36) 39