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 $442,700. 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 $101,647 for the next 6 years. Management requires a 10% rate of return on all new investments.

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

Should the investment be accepted?

Internal rate of return %

Explanation / Answer

Internal rate of return is the discounting rate at which NPV of the project will be zero.

Let "r" be the IRR,

By interpolation we get,

(r - 9) /(12-9) = (0-13278)/(-24789-13278)

r = 9 + 3 * (13278/38067) = 10% (approximately)

As the management requires 10% return on all new investments and as the IRR of the project is 10% (in fact slightly greater than 10%), the project should be accepted.

Particulars cash flow PVIFA @ 9% PV ofcash flows PVIFA @12% PV of cash flow Cash Outflow -442700 1 -442700 1 -442700 Cash Inflow(1-6)years 101647 4.4859 455978 4.1114 417911 NPV 13278 -24789

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