Leo supervises operations for a small manufacturing company. The company wants t

Question

Leo supervises operations for a small manufacturing company. The company wants to expand, so upon Leo's recommendation, it purchased a new robotic assembly system for $200,000. The first year they saved $17,000. The second year they saved $30,000 and savings increased by $15,000 each year until the end of year 5. Unfortunately, Leo had picked the lower cost model, thinking it would be a better deal. By the 6th year, the machine began to have problems and it only saved $12,000. At this point, the machine was broken down more than it was working so upper management decided to scrap it. The machine had salvage value of $7,000 at the end of year 6. Leo argued that he had made a good decision because it saved the company $46,000. What is the actual IRR for this investment? Calculate your answer to the nearest 0.10.

Using a 10% MARR, calculate the actual present worth of the packaging system.

Explanation / Answer

IRR = NPV of future cash flows - initial investment

IRR = 5.64% using the financial calulator or excel

Year inflow/outflow Discount factor Present value 0 (200,000) 1.000 (200,000) 1 17,000 .90909 15,455 2 30,000 .82645 24,794 3 45,000 .75131 33,809 4    60,000 .68301 40,981 5 75,000 .62092 46,569 6 19,000 .56447 10,725

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