1) Bruno Corporation is involved in the business of injection molding of plastic
ID: 2401203 • Letter: 1
Question
1) 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 $443,700. 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 $117,242 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.)
Should the investment be accepted?
2.
Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $271,000. A new salon will normally generate annual revenues of $64,015, with annual expenses (including depreciation) of $41,200. At the end of 15 years the salon will have a salvage value of $80,000.
Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.)
Explanation / Answer
1.
Internal rate of return = Initial investment / Annual cash flows
= 443,700 / 117,242
= 3.78
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The discount factor for the 6th year at 10% is 4.355. The project should not be accepted.
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2.
Annual income = Annual revenues - Annual expenses
= 64,015 - 41,200
= 22,815
Average investment = 271,000 / 2 = 135,500
Annual rate of return = Annual income / Average investment
= 22,815 / 135,500
= 0.1683
= 16.83%
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