Question

Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 12B-1 and Exhibit 12B-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 14%, what is the machine's net present value? 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $38,090 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.) Internal rate of return 2. Net present value 3. Internal rate of return

Answer 1

1
Investment cost	137320
Divide by Net annual cash flows	40000
PV factor for Internal rate of return	3.433
The PV factor 3.433 for 5 years is closest to 14%
Internal rate of return = 14%
2
Net annual cash flows	40000
X PV factor	3.433	=(1-(1.14)^-5)/0.14
Present value of Net annual cash flows	137320
Less: Investment cost	137320
Net present value	0
3
Investment cost	137320
Divide by Net annual cash flows	38090
PV factor for Internal rate of return	3.605
The PV factor 3.605 for 5 years is closest to 12%
Internal rate of return = 12%