Garrett Boone, Farish Enterprises’ vice president of operations, needs to replac

Question

Garrett Boone, Farish Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $289,495 and will last for 8 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $37,100 per year. He also believes the lathe will reduce energy costs by $28,350 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,206. Calculate the lathe’s internal rate of return,

Explanation / Answer

Now , 289495 = 65450 * Summation of Discounting Factor + 5206 * Discounting factor

= Discounting factor = 16%

Hence lathe's internal rate of return is 16%

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