Exercise 12-5 Bruno Corporation is involved in the business of injection molding

Question

Exercise 12-5

Bruno 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 $425,800. 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 $100,649 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table.

Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Should the investment be accepted?

Explanation / Answer

Calculate the internal rate of return on this new machine.

Internal Rate of Return (IRR) of the project is “11%“

Internal Rate of Return Factor          = Net Initial Investment / Annual Cash Flow

                                                = $4,25,800 / $1,00,649

                                                = 4.2304

From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 4.2305 for 6 Years is 11%

Should the investment be accepted?

YES,THE PROJECT SHOULD BE ACCEPTED

If the internal rate of return promised by the investment project is greater than or equal to the minimum required rate of return, the project is considered acceptable otherwise the project is rejected.

In this proposal, the Internal rate of return (11%) is greater than the required rate of return (10%), “ HENCE THE PROJECT SHOULD BE ACCEPTED “

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