Bruno Corporation is involved in the business of injection molding of plastics.

Question

Bruno 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 $453,000. 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 $119,699 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table. Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return % Should the investment be accepted? The investment be accepted.

Explanation / Answer

Calculation of the internal Rate of Return NPV at 10% NPV = Present Value of Cash Inflows- Cash Outflows NPV= 119699*4.35-453000 521320-453000 NPV = $68,320 NPV at 15% NPV = 119699*3.32-453000 398060-453000 -54940 IRR = Lower Rate+ NPV at Lower Rate/ NPV at Lower Rate- NPV at Higher Rate ( Higher Rate- Lower Rate) 10+68320/68320+54940 ( 20-10) 10+5.54 15.54 The internal Rate of Return is 15.54%

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