Henrie\'s Drapery Service is investigating the purchase of a new machine for cle
ID: 2526269 • Letter: H
Question
Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $113,730, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 138-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. Required: 1, what is the machine's internal rate of return? (Round your answer to whole decimal place ie. 0.123 should be considered as 12%, 2. Using a discount rate of 10%, what is the machine's net present value? interpret your results. 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $27,000 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 1296) 10 % 1. Internal rate of return 2. Net present value 3. Internal rate of return 61%Explanation / Answer
1.Internal Rate of return = 10%
Present Value Annuity Factor = Cost / cash inflow
= $113730 / $30000
= 3.791
From the Table IRR corresponding to 3.791 for 5 years = 10%
2. Net present value (NPV) = 0 (ZERO)
= $30,000 x (PVAF 10%,5 Years) - $113730
= ($30,000 x 3.791) - $1,13,730
= $1,13,730 - $1,13,730
= 0 (ZERO)
As we Know, IRR is the rate at which the NPV is Zero and here the 10% rate is the IRR and so the NOV Would be Zero
3.Internal Rate of return = 6%
Present Value Annuity Factor = Cost / cash inflow
= $113730 / $27000
= 4.212
From the Table IRR corresponding to 4.212 for 5 years = 6%
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