Bruno Corporation is involved in the business of injection molding of plastics.

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 $431,100. 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 $98,984 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table.

1.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.) Internal rate of return %

2.Should the investment be accepted? The investment be accepted.

Explanation / Answer

Cost of the machine = $431,100

Net annual cash flows = $98,984 for 6 years

Required rate = 10%

Internal Rate of return factor = Investment required / Net Annual Cash Inflow

= 431,100 / 98,984 = 4.35524

Now see IRR factor of 4.35524 in 6 years line of PV annuity factor table. The corresponding rate is 10% for 6 years.

So, IRR is 10%.

Yes , the project should be accepted as IRR is 10% which is equal to the required rate of return on all new investments by the management.

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