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 $441,000. 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 $116,529 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

shouldshould not

be accepted.

Answer 1

Answer :- Calculation of Internal Rate of Return (IRR) :-

Initial investment = $441,000

Net annual cash flows = $116,529

N = 6 years

PV factor for IRR :- Initial investment/ Net annual cash flows

PV factor for IRR :- $441,000/ $116,529

PV factore for IRR :- 3.78446

When we see in the factor table 3.78556 falls under 15%.

Internal rate of return (IRR) = 15%

- Yes, investment should be accepted because the IRR is more than the required rate of return which is 10%.