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 $430,900. 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 $113,860 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.) Internal rate of return Should the investment be accepted? The investment be accepted.

Answer 1

Cost of equipment is $430900 and annual cash flows is $113860

So Irr is equal to $430900/ $113860= 3.7844

The discounted factor for 6th year at 10% is 4.35526

So as the rate of return generated from irr is less than the discounted factor the investment should not be accepted.

Thank you.