Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $151,640, 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 10%, 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 $35,030 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%.)
1 | |
Investment cost | 151640 |
Divide by Annual cash flows | 40000 |
PV factor for internal rate of return | 3.791 |
The PV factor 3.791 for 5 years is closest to 10% | |
Internal rate of return = 10% | |
2 | |
Annual cash flows | 40000 |
X PV factor 10% | 3.791 |
Present value of Annual cash flows | 151640 |
Less: Investment cost | 151640 |
Net present value | 0 |
3 | |
Investment cost | 151640 |
Divide by Annual cash flows | 35030 |
PV factor for internal rate of return | 4.329 |
The PV factor 4.329 for 5 years is closest to 5% | |
Internal rate of return = 5% |
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