Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $125,080, including freight and installation. Henrie’s has estimated that 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.

    

Required:

1.	Enter the Excel formula inputs and compute the machine’s internal rate of return.

     

2.	Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $34,700 per year, instead of $40,000 per year. Enter the Excel formula inputs and compute the machine’s internal rate of return.

     

Answer 1

Rreq 1:
IRR
Annual inflows			40000
Annuity present value factor			3.127
(at 18% for 5 years)
Present value of inflows			125080
Less: Initial investment			125080
Net present value			0
hence, IRR is 18%
Req 2:
IRR
Annual inflows			34700
Annuity present value factor			3.6046
(at 12% for 5 years)
Present value of inflows			125079.6
Less: Initial investment			125080
Net present value			0
IRR is 12%