Brighton Beach Industries is considering the purchase of a new strapping machine

Question

Brighton Beach Industries is considering the purchase of a new strapping machine, which will cost $150,000, plus an additional $10,500 to ship and install.

The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.

The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years.

The machine is expected to have a salvage value of $20,000. Creighton's income tax rate is 35%. What is the machine IRR?

A. 18.80%

B. 20.03%

C. 15.75%

D. 19.15%

Explanation / Answer

150000 + 10500 = total initial cost = 160500
annual depreciation = 150000-20000/5 = 26000/year
profit per year b4 tax = 45000+16000 = 61000
income before tax = 35000
income after tax = 35000(0.65) = 22750
net income each year = 48750
for internal rate of return
160500 = 48750(1/(1+r) + 1/(1+r)2+....1/(1+r)5) + 20000/(1+r)5

answer = C.15.75%

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