Question

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown in Exhibit 123.1 and Exhibit 128.2 as you complete the requirement below. Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines. The outlay required is $ 730,671. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses $1,300,000 $1,000,000 1,300,000 1,000,000 1,300,000 1,000,000 1,000,000 1,300,000 5 1,300,000 1,000,000 Required: Compute the Investment's Internal Rate of return. Enter as a percent. If required, round your answer to the nearest whole percent. IRR = %

Answer 1

Solution 1:

Annual net cash inflows = $1,300,000 - $1,000,000 = $300,000

Initial investment = $730,671

Present value factor at IRR = Initial investment / Annual net cash inflows = $730,671/ $300,000 = 2.43557

Refer PV Factor table at period 5, this factor falls at IRR = 30%

Hence IRR = 30%

Solution 2:

Annual cash inflows = $1,200,000 - $1,000,000 = $200,000

Computation of NPV
Particulars	Period	Amount	PV factor at 12%	Present Value
Cash outflows:
Initial investment	0	$700,000.00	1	$700,000
Present Value of Cash outflows (A)				$700,000
Cash Inflows
Annual cash inflows	1-5	$200,000.00	3.6048	$720,956
Present Value of Cash Inflows (B)				$720,956
Net Present Value (NPV) (B-A)				$20,956