1.) Kanye Company is evaluating the purchase of a rebuilt spot-welding machine t
ID: 2797939 • Letter: 1
Question
1.) Kanye Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $175,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $37,138.
What is its approximate internal rate of return? (Round answer to 0 decimal place, e.g. 125.)
2.) Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $1,696,729. It will be used for 12 years, then sold for $719,400. The facility will generate annual cash inflows of $368,500 and will need new annual cash outflows of $153,200. The company has a required rate of return of 7%.
Calculate the internal rate of return on this project. (Round answer to 0 decimal place, e.g. 125.)
3.) Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $120,000 and will increase annual expenses by $68,000 including depreciation. The oil well will cost $468,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)
Explanation / Answer
1
0=-175000+37138/(1+IRR)+37138/(1+IRR)^2......37138/(1+IRR)^7
=>0=-175000+37138/IRR*(1-1/(1+IRR)^7)
=>IRR=11.0002732315869%
2
0=-1696729+(368500-153200)/(1+IRR)+(368500-153200)/(1+IRR)^2......(368500-153200)/(1+IRR)^12+719400/(1+IRR)^12
=>0=-1696729+215300/IRR*(1-1/(1+IRR)^12)+719400/(1+IRR)^12
=>IRR=9.99465227921353%
3
Avergae Investment=(468000+11000)/2=239500
Average annual profit=(120000-68000)/10=5200
Accountig rate of return=5200/239500=2.1712%
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