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MBL4307-MODULE OVERVIEW-2018.pdf - Adobe Reader File Edit View Document Tools Window Help Question 4 10 marks Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost R130,400 including freight and installation. Henrie's has estimated that the new machine would increase the company's cash inflows, net of expenses, by R25,000 per year. The machine would have a 10-year useful life and no salvage value REQUIRED (Ignore income taxes.) 4.1 Compute the machine's internal rate of return to the nearest whole percent. 4.2 Compute the machine's net present value. Use a discount rate of 14%. Why do you have a zero net present value? Suppose that the new machine would increase the company's annual cash inflows, net of expenses, by only R22,500 per year. Under these conditions, compute the internal rate of returm to the nearest whole percent 4.3 Activate Windows Go to Settings to activat Windows. O Type here to search

Explanation / Answer

Year

cash flow

present value of cash flow at 14% = cash flow/(1+r)^n r= 14%

0

-130400

-130400.00

1

25000

21929.82

2

25000

19236.69

3

25000

16874.29

4

25000

14802.01

5

25000

12984.22

6

25000

11389.66

7

25000

9990.93

8

25000

8763.98

9

25000

7687.70

10

25000

6743.60

Net present value =sum of present value of cash flow

2.8912

IRR = Using IRR function in MS excel =irr(-130400,25000,25000,25000,25000,25000,25000,25000,25000,25000,25000)

14.00%

Year

cash inflow

present value of cash flow at 14% = cash flow/(1+r)^n r= 14%

0

-130400

-130400.00

1

22500

19736.84

2

22500

17313.02

3

22500

15186.86

4

22500

13321.81

5

22500

11685.79

6

22500

10250.70

7

22500

8991.84

8

22500

7887.58

9

22500

6918.93

10

22500

6069.24

IRR = Using IRR function in MS excel =irr(-130400,22500,22500,22500,22500,22500,22500,22500,22500,22500,22500)

11%

Year

cash flow

present value of cash flow at 14% = cash flow/(1+r)^n r= 14%

0

-130400

-130400.00

1

25000

21929.82

2

25000

19236.69

3

25000

16874.29

4

25000

14802.01

5

25000

12984.22

6

25000

11389.66

7

25000

9990.93

8

25000

8763.98

9

25000

7687.70

10

25000

6743.60

Net present value =sum of present value of cash flow

2.8912

IRR = Using IRR function in MS excel =irr(-130400,25000,25000,25000,25000,25000,25000,25000,25000,25000,25000)

14.00%

Year

cash inflow

present value of cash flow at 14% = cash flow/(1+r)^n r= 14%

0

-130400

-130400.00

1

22500

19736.84

2

22500

17313.02

3

22500

15186.86

4

22500

13321.81

5

22500

11685.79

6

22500

10250.70

7

22500

8991.84

8

22500

7887.58

9

22500

6918.93

10

22500

6069.24

IRR = Using IRR function in MS excel =irr(-130400,22500,22500,22500,22500,22500,22500,22500,22500,22500,22500)

11%

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