Scheer Corporation is involved in the business of injection molding of plastics.

Question

Scheer 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 $438,100. 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 $106,557 for the next 6 years. Management requires a 14% rate of return on all new investments.

Calculate the internal rate of return on this new machine. (Use the tables to determine the percentage. Round answer 0 decimal places, e.g. 10.)

Internal rate of return= %

Should the investment be accepted?

Explanation / Answer

NPV at 11% = -438100 + 106557 x 4.231 = $12742.667 (find by trial and error that 11% will likely result in a NPV nearest to zero) NPV at 12% = -438100 + 106557 x 4.111 = -$44.173 IRR = 11% + [12742.667/(12742.667 + 44.173) x 1] = 12% IRR is less than 14% rate of return required, thus the investment should not be accepted. Hope this helps!

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