sler Corporation is involved in the business of injection molding of plastics. I

Question

sler 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 $437,400. 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 $106,387 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10.) Internal rate of return % Should the investment be accepted? The investment be accepted.

Explanation / Answer

Internal rate of return (IRR) is that disount rate which will make the NPV equal to 0 or that discount rate which will make the PV of cash inflows equal to PV of cash outflows.

That is 437400 = 106387*pvifa(irr,6)

437400/106387 = 4.11140 = pvifa(irr,6)

From the interest factor table against n = 6, the factor of 4.11140 is for 12%. Hence, IRR is 12%.

Since IRR of 12% is greater than the required rate of return of 10% prescribed by management, the project can be accepted.

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