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 $430,900. 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 $101,855 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.

Should the investment be accepted

Explanation / Answer

IRR calculation   DETails Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Investment in Machine          (430,900) Net Annual Cash inflows          101,855         101,855    101,855       101,855        101,855        101,855 Net Cash flows        (430,900)          101,855         101,855    101,855       101,855        101,855        101,855 PV factor @11%               1.000              0.901              0.812         0.731            0.659             0.593            0.535 PV of Net Cash flows        (430,900)            91,761            82,668      74,475          67,095          60,446          54,456 NPV =                 1.43 So at required rate of return 11% , the NPV is close to 0. So IRR is 11% As IRR is > than the 10% required rate of return, the investment should be accepted.

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