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 $430,100. 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 $113,648 for the next 6 years. Management requires a 10% rate of return on all new investments. (Refer the below table)

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) Cash Outflow -430100 Net cash Inflow 113648 Number of years 6 Required rate of return 10% = 0.10 NPV = R * (1 -( 1 + i) -n) / I - Initial Cost          = 113648 * ( 1 - (1.10)-6)/0.10 - 430100          = 113648 * ( 1 - 0.5645)/0.10 - 430100          = 113648 * (0.4355/ 0.10) - 430100           = 113648 * 4.355 - 430100           = 494837.04 - 430100           = 64837.04 Now IRR is where NPV = 0 , At 10% , NPV is positive , hence lets try at i= 15% = 0,15 NPV = R * (1 -( 1 + i) -n) / I - Initial Cost          = 113648 * ( 1 - (1.15)-6)/0.15 - 430100          = 113648 * ( 1 - 0.4323)/0.15 - 430100          = 113648 * (0.5677/ 0.15) - 430100           = 113648 * 3.785 - 430100           = 430120 - 430100           = 20 This is closest to 0 , hence IRR = 15% b) The project should be accepted as its IRR is higher than the required rate of return

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