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

Question

Eisler 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 $450,400. 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 $119,012 for the next 6 years. Management requires a 10% rate of return on all new investments.

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10.)

Should the investment be accepted?

Explanation / Answer

Initial Investment = $450,400
Annual Net Cash Flows = $119,012
Period of Life = 6 years

IRR Factor = Initial Investment / Annual Net Cash Flows
IRR Factor = $450,400 / $119,012
IRR Factor = 3.78449

Using PVA of $1 table at n = 6, i = 15%

Internal rate of return = 16%

The investment should be accepted as IRR is higher than the required rate of return

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