(Ignore income taxes in this problem.) The Valentine Company has decided to buy
ID: 2497883 • Letter: #
Question
(Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $51,506. Estimated cash savings from using the new machine amount to $9,100 per year. The machine will have no salvage value at the end of its useful life of twelve years.
If Valentine's required rate of return is 8%, the machine's internal rate of return is closest to:
(Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $51,506. Estimated cash savings from using the new machine amount to $9,100 per year. The machine will have no salvage value at the end of its useful life of twelve years.
Click here to view Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.If Valentine's required rate of return is 8%, the machine's internal rate of return is closest to:
Explanation / Answer
Statement showing Cash flows Particulars Time PVf@15% Amount PV Cash Outflows (Machine) - 1.00 (51,506.00) (51,506.00) PV of Cash outflows (51,506.00) Cash inflows (Cash Savings) 1.00 0.8696 9,100.00 7,913.04 Cash inflows (Cash Savings) 2.00 0.7561 9,100.00 6,880.91 Cash inflows (Cash Savings) 3.00 0.6575 9,100.00 5,983.40 Cash inflows (Cash Savings) 4.00 0.5718 9,100.00 5,202.95 Cash inflows (Cash Savings) 5.00 0.4972 9,100.00 4,524.31 Cash inflows (Cash Savings) 6.00 0.4323 9,100.00 3,934.18 Cash inflows (Cash Savings) 7.00 0.3759 9,100.00 3,421.03 Cash inflows (Cash Savings) 8.00 0.3269 9,100.00 2,974.81 Cash inflows (Cash Savings) 9.00 0.2843 9,100.00 2,586.79 Cash inflows (Cash Savings) 10.00 0.2472 9,100.00 2,249.38 Cash inflows (Cash Savings) 11.00 0.2149 9,100.00 1,955.98 Cash inflows (Cash Savings) 12.00 0.1869 9,100.00 1,700.86 PV of Cash Inflows 49,327.63 NPV (2,178.37) Statement showing Cash flows Particulars Time PVf@13% Amount PV Cash Outflows (Machine) - 1.00 (51,506.00) (51,506.00) PV of Cash outflows (51,506.00) Cash inflows (Cash Savings) 1.00 0.8850 9,100.00 8,053.10 Cash inflows (Cash Savings) 2.00 0.7831 9,100.00 7,126.63 Cash inflows (Cash Savings) 3.00 0.6931 9,100.00 6,306.76 Cash inflows (Cash Savings) 4.00 0.6133 9,100.00 5,581.20 Cash inflows (Cash Savings) 5.00 0.5428 9,100.00 4,939.12 Cash inflows (Cash Savings) 6.00 0.4803 9,100.00 4,370.90 Cash inflows (Cash Savings) 7.00 0.4251 9,100.00 3,868.05 Cash inflows (Cash Savings) 8.00 0.3762 9,100.00 3,423.05 Cash inflows (Cash Savings) 9.00 0.3329 9,100.00 3,029.25 Cash inflows (Cash Savings) 10.00 0.2946 9,100.00 2,680.75 Cash inflows (Cash Savings) 11.00 0.2607 9,100.00 2,372.35 Cash inflows (Cash Savings) 12.00 0.2307 9,100.00 2,099.42 PV of Cash Inflows 53,850.59 NPV 2,344.59 NPV @13% 2,344.59 NPV @15% (2,178.37) Diff @2% 4,522.95 IRR = 13%+ 2%*2344.59/4522.95 IRR = 14.04% Approx
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