(Ignore income taxes in this problem.) The Valentine Company has decided to buy
ID: 2453614 • Letter: #
Question
(Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $33,551. Estimated cash savings from using the new machine amount to $7,000 per year. The machine will have no salvage value at the end of its useful life of twelve years.
If Valentine's required rate of return is 11%, the machine's internal rate of return is closest to: (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate.)
(Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $33,551. Estimated cash savings from using the new machine amount to $7,000 per year. The machine will have no salvage value at the end of its useful life of twelve years.
Click here to view Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.If Valentine's required rate of return is 11%, the machine's internal rate of return is closest to: (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate.)
Explanation / Answer
NPV of the machine @ 11%
= 7000*PVAF ( 11%,12 years ) -33551
= 7000*7.9427 - 33551
= 22047
NPV of the machine @ 30%
= 7000*PVAF ( 30%,12 years ) - 33551
= 7000*3.1902 - 33551
= 22331-33551 i.e -11219
IRR = 11% + 12.60 i.e 23.60%
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