Exercise 9-11 Flounder Hammocks is considering the purchase of a new weaving mac

Question

Exercise 9-11 Flounder Hammocks is considering the purchase of a new weaving machine to prepare fabric for its hammocks. The machine under consideration costs $85,714 and will save the company $13,600 in direct labor costs. It is expected to last 14 years. Click here to view the factor table. (a) Calculate the internal rate of return on the weaving machine. Internal rate of return (b) If Flounder uses a 12% hurdle rate, should the company invest in the machine? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

a) Internal rate of return = saving / investment = 13600/85714 = 15.87%

b) Net present value = saving * PVIFA(12%,14) - Investment = 13600*6.628 - 85714 = 90141 - 85714 = $4427

Yes, NPV being positive so the company should invest in the machine.

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