Question

Campbell manufacturing company has an opportunity

Exercise 16-9 Determining the internal rate of return LO 16-3 Campbell Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company's cash outflow for operating expenses by $1,276,000 per year. The cost of the equipment is $5,877,950.14. Campbell expects it to have a 9-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the internal rate of return of the investment opportunity (Do not round intermediate calculations.) b. Indicate whether the investment opportunity should be accepted a Internal rate of retum b. Should the investment opportunity be accepted?

Answer 1

А В C IAns Annual Cashflow-Reduction in Operating Expenses+ Depreciation 2 Depreciation= (Cost of Equipment- Salvage Value)/ Useful Life (5877950.14-0)/ 9 Years 653105.571 Annual Cashflow=$(1276000+653105.57|1) 1929105.5711 4 5 IRR is a rate at which the Net Present Value of a Project will be Nil. 6 Year Cashflow -5877950.1400 7 0 8 1929105.5711 9 2 1929105.5711 10 1929105.5711 П 4 1929105.5711 12 5 1929105.5711 13 6 1929105.5711 14 1929105.5711 15 1929105.571 16 9 1929105.571| IRR 17 29.65% 18 19 Ans 2 Yes the investment to be accepted 20 Reason The return from project(i.e. 29.65%) is more than the required return i.e 15% 21 ш 7 CO LO