Exercise 9-11 Your answer is partially correct. Try again. Flounder Hammocks is

Question

Exercise 9-11 Your answer is partially correct. Try again. 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. 15.87 Internal rate of return (b) If Flounder uses a 12% hurdle rate, should the company invest in the machine? Yes Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

1.

85714=13600/1.0x+13600/1.0x^2+13600/1.0x^3+.............+13600/1.0x^14

Hence x=irr=13%

2.

Hence since irr is greater than the hurdle rate;investment must be made.

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