Upper Darby is considering a new capital investment. The following information i
ID: 2556109 • Letter: U
Question
Upper Darby is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $144,192. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a useful life of 5 years, at which time the terminal disposal value is expected to be zero. Upper Darby is assuming no tax consequences. What is the internal rate of return (IRR)? a. 10.00%. b. 12.00% c. 14.00%. d. 16.00%. Lewington Corporation has purchased new equipment that cost $144,965. The equipment is expected to last three years and to provide cash inflows as follows: Year-1 $45,000 Year-2 $60,000 Year-3 2,22? Assuming that the equipment will have an internal rate of return of 12%, what is the expected cash inflow for year 3? a. $51,280 b. $80,000 c. $39,965 d. $56,130Explanation / Answer
Internal rate of return (IRR) computation:
Internal rate of return factor = Investment required/ Net annual cash inflow
= $144,192/$40,000
= 3.6048
Now see internal rate of return factor (3.6048) in 5 year line of the present value of an annuity table. After finding this factor, see the corresponding interest rate written at the top of the column. It is 12%. Internal rate of return is, therefore, 12%.
Third Year Cash inflow computation
Net Present Value @ 12%
Cash Flow
A
Discount Factor
B
Present Value
AxB
(144,946)
1.0000
(144,946)
45.000
0.8928
40,176
60,000
0.7972
47,832
?
0.7118
0.00000
??NPV1 56,938.00
From above table we can Identified that the net present value at the end of second year is $56,986. And at end of the third year NPV is going to be zero. Hence, in order to get the third year cash inflow we can divide the second year NPV by discount factor of third year.
Hence,
Third Year Cash inflow = 56,938.00/0.7118
= $80,000.00
Cash Flow
A
Discount Factor
B
Present Value
AxB
(144,946)
1.0000
(144,946)
45.000
0.8928
40,176
60,000
0.7972
47,832
?
0.7118
0.00000
??NPV1 56,938.00
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