Henrie\'s Drapery Service is investigating the purchase of an new machine for cl
ID: 2444222 • Letter: H
Question
Henrie's Drapery Service is investigating the purchase of an new machine for cleaning and blocking drapes. The machine would cost $130,400, including freight and installation. Henrie's has estimated that the new machine would increase the company´s cash inflows, net of expenses, by $25,000 per year. The machine would have a 10-year useful life and no salvage value. (Ignore income taxes.)Required:
(a) Compute the machine's internal rate of return.
Internal rate of return __________%
(b) Compute the machine's net present value. Use a discount rate of 14%.
Net present value $_______________
(c) Suppose that the new machine would increase the company's annual cash inflows, net of expenses, by only $22,500 per year. Under these conditions, compute the internal rate of return.
Internal rate of return ______________%
Explanation / Answer
(a) Compute the machine's internal rate of return.
Internal rate of return __________%
Calculating Internal Rate of Return
(IRR) using Ms-Excel “Spread sheet”
years
A
0
($130,400)
1
$25,000
2
$25,000
3
$25,000
4
$25,000
5
$25,000
6
$25,000
7
$25,000
8
$25,000
9
$25,000
10
$25,000
IRR=
14%
(b) Compute the machine's net present value. Use a discount rate of 14%.
Net present value $_______________
Calculating Net Present Value
years
A
0
($130,400)
1
($130,400)
1
$25,000
0.877
$21,925.00
2
$25,000
0.769
$19,225.00
3
$25,000
0.675
$16,875.00
4
$25,000
0.592
$14,800.00
5
$25,000
0.519
$12,975.00
6
$25,000
0.456
$11,400.00
7
$25,000
0.4
$10,000.00
8
$25,000
0.351
$8,775.00
9
$25,000
0.308
$7,700.00
10
$25,000
0.27
$6,750.00
Net Present Value
$25
(c) Suppose that the new machine would increase the company's annual cash inflows, net of expenses, by only $22,500 per year. Under these conditions, compute the internal rate of return.
Internal rate of return ______________%
Calculating Internal Rate of Return
(IRR) using Ms-Excel “Spread sheet”
years
A
0
($130,400)
1
$22,500
2
$22,500
3
$22,500
4
$22,500
5
$22,500
6
$22,500
7
$22,500
8
$22,500
9
$22,500
10
$22,500
IRR=
11%
Calculating Internal Rate of Return
(IRR) using Ms-Excel “Spread sheet”
years
A
0
($130,400)
1
$25,000
2
$25,000
3
$25,000
4
$25,000
5
$25,000
6
$25,000
7
$25,000
8
$25,000
9
$25,000
10
$25,000
IRR=
14%
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