Question

Bruno 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 $430,600. 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 $104,733 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.

Answer 1

Year	Cash Flow	PV Factor	Present Value
		1 / (1 + 11%)^Year	Cash Flow X PV Factor
0	$        (430,600)	1.000	$              (430,600.00)
1	$          104,733	0.901	$                   94,354.05
2	$          104,733	0.812	$                   85,003.65
3	$          104,733	0.731	$                   76,579.87
4	$          104,733	0.659	$                   68,990.87
5	$          104,733	0.593	$                   62,153.94
6	$          104,733	0.535	$                   55,994.54
			$                   12,476.92

NPV at 11% is $ 12,476.92

Let us calculate NPV at 13% now

Year	Cash Flow	PV Factor	Present Value
		1 / (1 + 13%)^Year	Cash Flow X PV Factor
0	$        (430,600)	1.000	$              (430,600.00)
1	$          104,733	0.885	$                   92,684.07
2	$          104,733	0.783	$                   82,021.30
3	$          104,733	0.693	$                   72,585.22
4	$          104,733	0.613	$                   64,234.71
5	$          104,733	0.543	$                   56,844.88
6	$          104,733	0.480	$                   50,305.20
			$                 (11,924.62)

NPV is $ (11,924.62) at 13%

So using unitary method, IRR is 12%