Question

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 $437,500. 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 $100,453 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table.

Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Answer 1

Year	Annual Cash Flow	NPV Factor at 10% Discount rate	Discounted Cash Flow
1	$ 1,00,453.00	0.90909	$      91,321
2	$ 1,00,453.00	0.82645	$      83,019
3	$ 1,00,453.00	0.75131	$      75,471
4	$ 1,00,453.00	0.68301	$      68,610
5	$ 1,00,453.00	0.62092	$      62,373
6	$ 1,00,453.00	0.56447	$      56,703
Present velue of Cash Inflows			$ 4,37,498
Less: Initial Investment			437500
Net Present value			$              (2)

IRR= 10%

Internal rate of return is the rate of return at which net present value of the project is Zero.

In the above solution we can see that rate of 10% Is already giving NPV of $2 which is only due to round off error. We can take it as zero instead of 2.

Internal rate of return is 10% .

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