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Franklin Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the coTABLE 1 PRESENT VALUE OF $1 n 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% 1 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 n 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% 1 0.961538 0.952381 0.943396 0.934579 0.925

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Answer #1

Internal rate of return is the rate at which NPV = 0

I.e. present value of cash inflows = present value of cash outflows

Let it be x%

1273000*PVAF(x%, 11 years) = 7558690.83

PVAF(x%, 11 years) = 5.937699

Using Present value annuity factor table, x = 12%

Hence, Internal rate of return = 12%

No, should not be accepted as IRR is lower than the cost of capital

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