Question

Walton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,280,000 per year. The cost of the equipment is $5,559,796.48. Walton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Calculate the internal rate of return of the investment opportunity. (Do not round intermediate calculations.)

2. Indicate whether the investment opportunity should be accepted.

Answer 1

	Question I
		Annual Cash Flow=Reduction in Operating Expenses+ Depreciation
	A	Depreciation(5559796.48/8)--See Working Note	694,974.56
	B	Reduction in Operating Expenses	1,280,000.00
	C	Annual Cash Flow(A+B)	1,974,974.56
	IRR is a rate at which the net present value of a project will be nil
			Year	Cash Flow
			0	(5,559,796)
			1	1,974,975
			2	1,974,975
			3	1,974,975
			4	1,974,975
			5	1,974,975
			6	1,974,975
			7	1,974,975
			8	1,974,975
			IRR	31.57%	(Using Excel)
		Working Note
		Depreciation
		Cost of Equipment	5,559,796.48
		Less:Salvage Value	0
			5,559,796.48
		Useful Life	8.00
		Depreciation(5559796.48/8)	694,974.56
	Question II	Since the return from Project (31.57%) is more than the required return (15%),Investment has to accepted