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 dollar 451,100. 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 dollar 103,576 for the next 6 years. Management requires a 10 percent rate of return on all new investments. (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 percent Should the investment be accepted? The investment be accepted.

Explanation / Answer

Answer: a)

Calculation of IRR:

Discount factor = Initial investment/ Annual cash flow

= 451100/103576

= 4.35526

If we look into the factor table , PVIFA of 10% for 6 years is 4.35526. therefore, IRR is 10%.

We can also calculate the IRR in Excel as:

Answer:b)

Since the IRR is equal to the minimum required rate of return, therefore, the investment should be accepted.

Year Amount 0 -451100 1 103576 2 103576 3 103576 4 103576 5 103576 6 103576 IRR 10%

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.