Question

Exercise 25-05 Bruno 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 $443,000. 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 $104,715 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view the factor table. Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return enter the internal rate of return in percentages rounded to 0 decimal places % Should the investment be accepted? The investment select an option be accepted.

Answer 1

Answer:-

We have:

Initial investment =430,000

Annual inflow = 104,715

N= 6 years

By using the following formula to calculating irr:

Initial Investment = Annual Inflow * PVIFA(n, r%)

Here r is IRR.

Calculating by using the formula, we get

430000 = 104715 * PVIFA (6, r%)

Looking at the PVIFA table, R = 10.78%

Since irr is greater than the required return, We should invest in this project

Payback Period = Initial Investment/Annual Inflow

= 430000/104715 = 4.10 years