WileyPLUS l Contact Us 1 Kimmel, Accounting: Tools for Business Decision Making,

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WileyPLUS l Contact Us 1 Kimmel, Accounting: Tools for Business Decision Making, Se FINANCIAL AND MANAGERIAL ACCOUNTING Gradebook ment FULL SCREEN Exercise 24-5 Your answer is partially correct. Try again. Eisler 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 $429,100. The company believes that with this new machine it wil improve productivity and increase quality, resulting in an increase in net annual cash flows of $104,368 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.ge 10.) Internal rate of return 4.11 Should the investment be accepted? should The investment Click if you would like to Show Work for this question: Open Show Wark Question Attempts: 3 of 7 used SAVE FOR LATER SUBMET ANSWER lcy 1 22000-2018John Wiley & Sons Ins, All Rights Reverved. A Division of 2ohn Wiey.& ens ns Version 4.24.62

Explanation / Answer

1) Internal rate of return 12% 2) The Investment should be accepted because internal rate of return is more than required return on new investments. a. Calculate Net Present Value at 10% Year Cash flows Discount factor Present Value 0 $         -4,29,100               1.00000 $     -4,29,100 1               1,04,368               0.90909               94,880 2               1,04,368               0.82645               86,255 3               1,04,368               0.75131               78,413 4               1,04,368               0.68301               71,284 5               1,04,368               0.62092               64,804 6               1,04,368               0.56447               58,913 Net Present Value               25,449 At Internal rate of return, Net Present Value is zero. At 10% rate , it has positive Net Present Value.Present Value of cash inflows and Discount rate has inverse relation that means if discount rate increases, present value decreases and vice versa. So, Internal rate of return will be more than 10% to get Net Present Value to $ 0. b. Calculate Net Present Value at 20% Year Cash flows Discount factor Present Value 0 $         -4,29,100               1.00000 $     -4,29,100 1               1,04,368               0.83333               86,973 2               1,04,368               0.69444               72,477 3               1,04,368               0.57870               60,398 4               1,04,368               0.48225               50,331 5               1,04,368               0.40188               41,943 6               1,04,368               0.33490               34,953 Net Present Value             -82,024 At 20%, Net Present Value is negative.So, we can conlclude that Internal rate of return is between 10% to 20%. As per approximate method, Internal rate of return = 10%+(20%-10%)*(25449/(25449+82024)) = 12%

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