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 $452,500. 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 $119,567 for the next 6 years. Management requires a 10% rate of return on all new investments.

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

B.) Should the investment be accepted?

Explanation / Answer

A) Initial investment 452500 Net annual cash flow 119567 n = 6 years IRR is when NPV = 0 Let us assume the rate of return to be 15% then NPV = CF * ( 1 -( 1 + i)-n)/i - Initial Investment                     = 119567 * ( 1 - ( 1 +0.15)-6)/0.15 - 452500                      = 119567 * ( 1 -0.4323)/0.15 - 452500                      = 119567 * 0.5677/0.15 - 452500                      = 119567 * 3.7847 - 452500                      = 452521.2 - 452500                      = 21.2 Hence IRR = 15% B) Yea the project should be accepted as the IRR is greater than the required rate of return

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