Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2, LO13-3] He

Question

Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2, LO13-3]

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $163,700, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by $50,000 per year. The machine would have a five-year useful life and no salvage value.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

Compute the machine’s internal rate of return to the nearest whole percent.

Compute the machine’s net present value. Use a discount rate of 16%. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $41,000 per year. Under these conditions, the internal rate of return to the nearest whole percent.

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $163,700, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by $50,000 per year. The machine would have a five-year useful life and no salvage value.

Explanation / Answer

Year Cas Flow Discount factor 16% Discounted Cash Flow 0 -163700 1 -163700 1 1 50000 0.862 43100.00 0.926 2 50000 0.743 37150.00 0.857 3 50000 0.641 32050.00 0.794 4 50000 0.552 27600.00 0.735 5 50000 0.476 23800.00 0.681 NPV 0.00 Ans 2 Ans 1IRR is where NPV is 0 so at 16% NPV is 0 so IRR=16% Ans 3 Cash Oulflow -163700 Cash Inflow PVIFA(16%,5) 41000*3.274 134234 NPV -29466 Now the IRR will be less than 16% now we have to do trial and error lets take 10% Cash Oulflow -163700 Cash Inflow PVIFA(10%,5) 41000*3.791 155431 NPV -8269 It is negative at 10% also so lets take 8% Cash Oulflow -163700 Cash Inflow PVIFA(8%,5) 41000*3.993 163713 NPV 13 Irr 8%

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