Problem 3. The Walton Daily News is investigating the purchase of a new auxiliar

Question

Problem 3. The Walton Daily News is investigating the purchase of a new auxiliary press that has a projected life of 20 years. It is estimated that the new press will save $21,500 per year in cash operating costs. If the new press costs $195,000, what is its internal rate of return? Is the press an acceptable investment if the company's required minimum rate of return is 15%? Explain. How much would the annual cash inflows (cost savings) have to be for the new press to provide the required 15% rate of return? a. b. c.

Explanation / Answer

Year

cash flow

0

-195000

1

21500

2

21500

3

21500

4

21500

5

21500

6

21500

7

21500

8

21500

9

21500

10

21500

11

21500

12

21500

13

21500

14

21500

15

21500

16

21500

17

21500

18

21500

19

21500

20

21500

A

IRR= using IRR function in MS excel

9.09%

B

No press is not an acceptable proposal as its required rate of return is 15% while its IRR is 9.09%

C

annual net savings to earn return equal to 15%

PMT = PV*I/1-(1+r)^-n

195000*15%/ (1-(1.15)^-20

29250/.9389

31153.48

Year

cash flow

0

-195000

1

21500

2

21500

3

21500

4

21500

5

21500

6

21500

7

21500

8

21500

9

21500

10

21500

11

21500

12

21500

13

21500

14

21500

15

21500

16

21500

17

21500

18

21500

19

21500

20

21500

A

IRR= using IRR function in MS excel

9.09%

B

No press is not an acceptable proposal as its required rate of return is 15% while its IRR is 9.09%

C

annual net savings to earn return equal to 15%

PMT = PV*I/1-(1+r)^-n

195000*15%/ (1-(1.15)^-20

29250/.9389

31153.48

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