Henrie\'s Drapery Service is investigating the purchase of a new machine for cle

Question

Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes The machine would cost $113,730, including freight and installation. Henrie's has estimated that the new machine would increase the company's cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using table. Required: Compute the machine's internal rate of return to the nearest whole percent. Compute the machine s net present value Use a discount rate of 10% (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Suppose that the new machine would increase the company net of expenses by only $27 000 per year Under these conditions the Internal fait of nearest whole percent

Explanation / Answer

Answer 1. Internal Rate of return Choose Numerator / Choose Denominator = Factor Number of Years Internal rate of return Investment Required / Annual Cash Inflow = Factor                                     113,730 /                                       30,000 =            3.7910 5 Years 10% Answer 2. Calculation of NPV Now 1 2 3 4 5 Purchase of machine       (113,730)                   -                     -                     -                     -                     -   Annual Cash inflows                     -            30,000          30,000          30,000          30,000          30,000 Total Cash Flows       (113,730)          30,000          30,000          30,000          30,000          30,000 Discount Factor (10%)            1.0000          0.9091          0.8264          0.7513          0.6830          0.6209 Present Value       (113,730)          27,273          24,792          22,539          20,490          18,627 Net Present Value                    (9) Answer 3. Internal Rate of return Choose Numerator / Choose Denominator = Factor Number of Years Internal rate of return Investment Required / Annual Cash Inflow = Factor                                     113,730 /                                       27,000 =            4.2122 5 Years 6%

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