Question

Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie's estimated 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. Click here to view Exhibt 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using table. Required 1. what is the machine's internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.) 2. Using a discount rate of 14%, what is the machine's net present value? Interpret your results. 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $38,090 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%) 1. Internal rate of return 2. Net present value 3. Intenal rate of return

Answer 1

Answer:

a) Calculation of IRR
IRR is the rate at which present value of cash inflows become equal to Initial cost
	Amount($)
Initial investment: Cost of equipment	$1,37,320
Annual net cash inflows	$40,000
PVAF (At IRR) = Initial incestment / Annual net cash inflows	3.433
Now we shall look for these PVAFs into Present value of annuity table in the row of 5 years
Hence we get Discount rate or IRR	14%(appr)

2.

Present Value of Cash inflows = Cash inflows from operating activities x Cumulative PVF @ 14% for 5 years

= (Net income from operations ) x Cumulative PVF @ 14% for 5 years

= $40,000x 3.433

= $137,320

NPV = Present value of cash inflows - Initial Investment

= $137,320-$137,320

= $ 000

C) Calculation of IRR
IRR is the rate at which present value of cash inflows become equal to Initial cost
	Amount($)
Initial investment: Cost of equipment	$ 1,37,320
Annual net cash inflows	$ 39,090
PVAF (At IRR) = Initial incestment / Annual net cash inflows	3.5129
Now we shall look for these PVAFs into Present value of annuity table in the row of 5 years
Hence we get Discount rate or IRR	13.20%(appr) i.e 13%