Horowitz Company is evaluating the purchase of a rebuilt spot-welding machine to
ID: 2491943 • Letter: H
Question
Horowitz Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $177,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $37,562.
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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
What is its approximate internal rate of return? (Round answer to 0 decimal place, e.g. 15.)
Explanation / Answer
When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table.
= $ 177,000 / $ 37,562 = 4.71221
By tracing across on the 7 year row we see that the discount factor for 11% is 4.7122. Thus, the internal rate of return on this project is approximately 11%
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