Question 1 Bailey, Inc., is considering buying a new gang punch that would allow

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Question 1 Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $80,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,000 per year using the gang punch, but raw material costs would decrease $10,500 per year. MARR is 5%/year. Click here to access the TVM Factor Table Calculator o/o What is the internal rate of return of this investment? Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is 40.2. What is the decision rule for judging the attractiveness of investments based on internal rate of return? Should Bailey buy the gang punch? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Net annual benefit ($) = Decrease in material cost - Increase in labor cost = 10,500 - 2,000 = 8,500

(a) Internal rate of return (IRR) is computed by Excel IRR function, and is equal to (as shown below).

(b) Decision rule is:

Buy the gang punch if IRR > MARR (5%).

Do not buy the gang punch if IRR < MARR (5%).

(c) YES

Since IRR > MARR (6.5% > 5%), Bailey should buy this.

Year Net Annual Benefit ($) 0 -80,000 1 8,500 2 8,500 3 8,500 4 8,500 5 8,500 6 8,500 7 8,500 8 8,500 9 8,500 10 8,500 11 8,500 12 8,500 13 8,500 14 8,500 15 8,500 IRR = 6.5%

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