Henrie\'s Drapery Service is investigating the purchase of a new machine for cle
ID: 2526458 • Letter: H
Question
Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $117,320, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $35,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 13B-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 i.e. O123 should be considered as 12%.) 2. Using a discount rate of 15%, 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 $30,160 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0123 should be considered as 1296) 1. Internal rate of return 2. Net present value 3. Internal rate of return 151% 2,187Explanation / Answer
1.Internal Rate of return = 15%
Present Value Annuity Factor = Cost / cash inflow
= $117320 / $35000
= 3.352
From the Table, IRR corresponding to 3.352 for 5 years = 15%
2. Net present value (NPV) = $62,804
= $35,000 x (PVAF 15%,5 Years) - $117320
= ($35,000 x 3.352) - $1,17320
= $1,17320 - $1,17320
= 0 (ZERO)
As we Know, IRR is the rate at which the NPV is Zero and here the 15% rate is the IRR and so the NPV Would be Zero
3.Internal Rate of return = 9%
Present Value Annuity Factor = Cost / cash inflow
= $117320 / $30160
= 3.8899
From the Table, IRR corresponding to 3.8899 for 5 years = 9%
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