Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,280, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value. Please help!!!

Pleae help!!

Answer 1

Concepts and reason

Capital budgeting: It is the process of planning used to determine the long-term and short-term investment decisions. Based on the result achieved, the investor can decide whether to make an investment or not. The investment decisions include accepting a project, purchase of an equipment etc.

Fundamentals

Internal rate of return: It is one of the discounted cash flow techniques. Internal rate of return is the interest rate that will cause the present value of the expected capital expenditure to equal the present value of the anticipated net annual cash flows. It means net present value equal to zero since, it recognizes the time value of money.

Net present value: It is one of the discounted cash flow techniques, it involves discounting net cash flow to their present value and then matching that present value with the capital expenditure required by the investment. The difference between these two amounts is net present value. Simply, net Present Value is the difference between the present value of cash inflows and initial investment.

The net present value can be expressed in terms of a formula:

${\rm{Net present value = Present cash inflows - Present cash outflows}}$

1.

Calculate the internal rate of return as shown below:

Therefore, the internal rate of return is 14.014%.

2.

Calculate the net present value as shown below:

Therefore, the net present value is $43.

3.

Calculate the internal rate of return as shown below:

Therefore, the internal rate of return is 11%.

Ans: Part 1

The internal rate of return is 14.014%.