Question

Martinez 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 $431,300. 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 $99,030 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 be accepted.

Answer 1

Investment cost	431300
Divide by Net annual cash flows	99030
PV factor for Internal rate of return	4.35525
The PV factor 4.35525 for 6 years is closest 10%
(1-(1.10)^-6)/0.10 = 4.35525
Internal rate of return = 10%
The investment should be accepted.