Exercise 9-11 Monty Hammocks is considering the purchase of a new weaving machin

Question

Exercise 9-11 Monty Hammocks is considering the purchase of a new weaving machine to prepare fabric for its hammocks. The machine under consideration costs $73,667 and will save the company $10,000 in direct labor costs. It is expected to last 14 years.

(a) Calculate the internal rate of return on the weaving machine.

Internal rate of return % =

(b) If Monty uses a 12% hurdle rate, should the company invest in the machine?

Explanation / Answer

a) Calculate the internal rate of return on the weaving machine. As per the present value equation, we have: $73667 = $10000(P/A,i, 14) => (P/A,i, 14) = 7.3667 Looking in the present value of an annuity table row for 14 periods, this factor is found in the 10% column. Therefore, the internal rate of return is 10%. b) Hurdle Rate is 12% and IRR is 10% . Hence Investment Should not be made in machine

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