Eisler corporation is involved in the business of injection molding of plastics.

Question

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 $430,000. 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 $101,000 for the next 6 years. Managesment requires a 10% rate of return on all new investments.

*Calculate the internal rate of return on this new machine. Should the investment be accepted. support your answer.

Explanation / Answer

To conclude whether the proposal should be accepted or not, the internal rate of return promised by machine would be found out first and then compared to the company’s minimum required rate of return. Internal Rate of return Factor = Investment Required / Net Annual Cash Inflow Internal Rate of return Factor = 430000 / 101000 = 4.257426 After computing the internal rate of return factor, the next step is to locate this discount factor in “present value of an annuity of $1 in arrears table”. Since the useful life of the machine is 6 years, the factor would be found in 6-period line or row. After finding this factor, see the rate of return written at the top of the column in which factor 4.257426 is written. It is 11%. It means the internal rate of return promised by the project is 10%. The final step is to compare it with the minimum required rate of return of the Eisler Corporation. That is 10%. Conclusion: According to internal rate of return method, the proposal is acceptable because the internal rate of return promised by the proposal (11%) is more than the minimum required rate of return (10%).

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