Question

Eisler 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 $440,200. 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 $101,073 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10.) Internal rate of return % Should the investment be accepted? The investment be accepted.

Answer 1

Determination of Internal Rate of Return (IRR) of the project

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

                                                = $4,40,200 / $1.01.073

                                                = 4.35527

From the Present Value Annuity Factor Table, We can find that the discount rate corresponding to the factor of 4.35527 for 6 Years Will be 10%

Dicision

If the internal rate of return promised by the investment project is greater than or equal to the minimum required rate of return, the project is considered acceptable otherwise the project is rejected.

In this proposal, the Internal rate of return (10%) is equals to the required rate of return (10%), “ HENCE THE PROJECT SHOULD BE ACCEPTABLE “