Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $105,510, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $30,000 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 answer to whole decimal place i.e. 0.123 should be considered as 12%.)

2. Using a discount rate of 13%, 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 $25,735 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.)

Answer 1