Question

In: Accounting

Bruno Corporation is involved in the business of injection molding of plastics. It is considering the...

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.)

Solutions

Expert Solution

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% .

If for any reason answer do not match please leave a comment.


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