Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $117,320, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $35,000 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 final answer to the nearest whole percentage.)

2. Using a discount rate of 15%, 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 $30,160 per year. Under these conditions, what is the internal rate of return? (Round your final answer to the nearest whole percentage.)

Answer 1

Answer:

1
Investment cost	117320
Divide by Annual cash flows	35000
PV factor for internal rate of return	3.352
The PV factor 3.352 for 5 years is closest to 15%
Internal rate of return = 15%
2
Present value of annual flows	117320	=35000*3.352
Less : Investment cost	117320
Net present value	0
3
Investment cost	117320
Divide by Annual cash flows	30160
PV factor for internal rate of return	3.890
The PV factor 3.890 for 5 years is closest to 9%
Internal rate of return = 9%