Question

Ayayai Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $449,500. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $118,775 for the next 6 years. Management requires a 10% rate of return on all new investments.

Click here to view PV table.

Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Internal rate of return

%

Should the investment be accepted?

The investment shouldshould not be accepted.

Answer 1

Answers

• Present Value annuity factor for Internal rate of return
  = $ 449,500 / $ 118775
  = 3.78447
• Look for PVA $1 table for Period 6, and see under which % rate the value equals 3.78447
• “3.78447” will fall under 15%
• Internal Rate of return = 15% Answer
• Yes, Investment should be accepted as IRR is more than required rate of return.