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 $431,700. 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 $102,044 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.)

Should the investment be accepted? yes or no

Explanation / Answer

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

431700=102044/1.0x+102044/1.0x^2+........+102044/1.0x^6

(431700/102044)=[1/1.0x+1/1.0x^2+.........+1/1.0x^6]

[1/1.0x+1/1.0x^2+.........+1/1.0x^6]=4.23053(Approx)

Hence x=IRR=11%(Approx)(Also looking at present value of annuity factor(11%,6 years)

Hence since IRR is higher than the required return;the investment should be accepted.

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