Bruno Corporation is involved in the business of injection molding of plastics.
ID: 2532516 • Letter: B
Question
Bruno 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 $428,600. 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 $104,246 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table.
Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
A.
B.
Should the investment be accepted?
Explanation / Answer
A. Calculation of Internal rate of New Machine
Initial Investment = $428,600
Annual Cash Inflow = $104,246
Factor of internal Rate of Return = INITIAL INVESTMENT / ANNUAL CASH INFLOW
= 428,600/104,246
=4.11142
Looking in Factor Table, a factor of 4.11142 for 6 years falls closest to the 12% rate of return.
So IRR = 12%
B. Should the Investment be Accepted
The discount factor for the 6th year at 10% is 4.35526,
The Management requires 10% of return but the new machine IRR is of12%
Therefore, the project should not be accepted.
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