BACK rief Exercise 24-7 anye Company is evaluating the purchase of a rebuilt spo

Question

BACK rief Exercise 24-7 anye Company is evaluating the purchase of a rebuilt spot- welding machine to be used in the manufacture of a new product. The machine will cost $175,000, has an estimated usefu life of 7 years, a salvage valum f zero, and will increase net annual cash flows by $38,345. Cick here to.view PV. table hat is its approximate internal rate of return? (Round answer to 0 decimal place, e.g. 125) nternal rate of return y accessing this Question Assistance, you will learn while you eam points based on the Point Potential Policy set by your instructor Question Attempts: Unlimited SAVE FOR LA

Explanation / Answer

Since future cash flows are equal,a rough approximation may be made with reference to the payback period.The payback period in the given case is :

Payback period = Intitial outflow / Annual cash inflow

= $175000 / $38345

= 4.564

Now,search for a value nearest to 4.564 in the 7th year row of PVAF table.The closest figure is given in rate of 12% .

So, the Approximation internal rate of return is 12%

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