1) Bruno Corporation is involved in the business of injection molding of plastic
ID: 2401404 • Letter: 1
Question
1) 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 $443,700. 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 $117,242 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?
2.
Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $271,000. A new salon will normally generate annual revenues of $64,015, with annual expenses (including depreciation) of $41,200. At the end of 15 years the salon will have a salvage value of $80,000.
Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.)
Explanation / Answer
Ans.1 Machine Value = $443,700
Net annual cash flow = $117,242 for next 6 years
Rate of Return = 10%
Intarnal Rate of Return = Machine Value / Net cash Flow
443,700/117,242 = 4%
Discount factor for the 6th years at 10% is 4.35526 , The investment should not be accepted.
Ans.2 cost of new Salon = $271,000
Annual Revenues = ( $64,015 - $41,200) = $22,815
Usefull life of salon = 15 years
Salvage Value = $80,000
Annual Rate of Return = 22815 : 271,000 + 80,000/2 = 175,500
= 22,815 / 175,500 = 13%
Intarnal Rate of Return 3.78447%Related Questions
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