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 $433,100. 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 $99,443 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.) Internal rate of return Should the investment be accepted?

Explanation / Answer

Statemnet showing Cash flows Particulars Time PVf@10% Amount PV Cash Outflows                            -                1.00      (433,100.00)    (433,100.00) PV of Cash outflows    (433,100.00) Cash inflows                     1.00          0.9091           99,443.00         90,402.73 Cash inflows                     2.00          0.8264           99,443.00         82,184.30 Cash inflows                     3.00          0.7513           99,443.00         74,713.00 Cash inflows                     4.00          0.6830           99,443.00         67,920.91 Cash inflows                     5.00          0.6209           99,443.00         61,746.28 Cash inflows                     6.00          0.5645           99,443.00         56,132.98 PV of Cash Inflows      433,100.19 NPV                   0.19 Statemnet showing Cash flows Particulars Time PVf@11% Amount PV Cash Outflows                            -                1.00      (433,100.00)    (433,100.00) PV of Cash outflows    (433,100.00) Cash inflows                     1.00          0.9009           99,443.00         89,588.29 Cash inflows                     2.00          0.8116           99,443.00         80,710.17 Cash inflows                     3.00          0.7312           99,443.00         72,711.86 Cash inflows                     4.00          0.6587           99,443.00         65,506.18 Cash inflows                     5.00          0.5935           99,443.00         59,014.58 Cash inflows                     6.00          0.5346           99,443.00         53,166.29 PV of Cash Inflows      420,697.38 NPV      (12,402.62) IRR = 10% since at 10% NPV =0. Required return is also 10% Thus project should be accepted since IRR is 10%

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