Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $113,730, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value.

Click here to view Exhibit 13B-1 and Exhibit 13B-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 10%, 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 $27,000 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%.)

Answer 1

The exhibit are not given
a) by using the present value of annuity table
Factor for internal rate of return=investment/cash inflow
=113730/30000
=3.791
The return is 10% for n=5 and factor value of 3.791

2)The net present value=-113730+(30000*0.9091)+(30000*0.8264)+(30000*0.7513)+(30000*0.6830)+(30000*0.6209)
=0
The answer is zero since the NPV at discount rate which is same as IRR will have net present value of zero

3)Factor for internal rate of return=investment/cash inflow
=113730/27000
=4.212
The return is 6% for n=5 and factor value of4.212