Question

Internal Rate of Return Analysis. Heston Farming Company would like to purchase a harvesting machine for...

Internal Rate of Return Analysis. Heston Farming Company would like to purchase a harvesting machine for $100,000. The machine is expected to have a life of 4 years, and a salvage value of $20,000. Annual maintenance costs will total $28,000. Annual savings are predicted to be $60,000. The company’s required rate of return is 11 percent (this is the same data as the previous exercise).

Required:

  1. Use trial and error to approximate the internal rate of return for this investment proposal.

  2. Should the company purchase the harvesting machine? Explain.

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Answer #1

IRR= 16.27%

Company should purchase the harvesting machine because IRR is greater than the required rate of return which means that the investment is a profitable one.

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