Carson is the manufacturing supervisor for Candy Crunch, Limited. Carson purchas

Question

Carson is the manufacturing supervisor for Candy Crunch, Limited. Carson purchased a candy wrapping machine for $350,000 to save on labor costs. The first year, the machine worked well and the company was able to save $200,000, with machine operating and maintenance expenses of $100,000. The second year, operating expenses were slightly higher at $150,000, but savings increased to $300,000. The third year, expenses increased again to $175,000, but savings maintained at $300,000 The fourth year, the machine began to experience some problems and broke down quite a bit. Expenses were $190,000 and savings decreased to $200,000. By the fifth year, the machine breakdowns were becoming more costly and it was apparent the machine would not last another year. The company spent $225,000 on operating and maintenance costs with savings of $200,000. The company sold the machine for scrap at the end of year 5 for $30,000 What is the actual IRR for this purchase? Calculate your answer to the nearest 0.10. (Hint: If using Excel, format the answer for 2 decimal places.) Enter your answer as 1.23. Do not use a percent ("%") sign. For example, if you calculate an IRR of 13.54%, enter it as 13.54

Explanation / Answer

IRR: 5.10

Present Worth: -$12295

IRR = 5% + [1417.15/(12295 + 1417.15)] = 5% + 0.10 =5.10

Year Cash inflow Cash outflow Net cash flow i=7% PW i=5% PW 0 -350000 -350000 1 -350000 1 -350000 1 200000 -100000 100000 0.93458 93458 0.95238 95238 2 300000 -150000 150000 0.87344 131016 0.90703 136054.5 3 300000 -175000 125000 0.8163 102038 0.86384 107980 4 200000 -190000 10000 0.7629 7629 0.8227 8227 5 200000 -225000 5000 0.71299 3565 0.78353 3917.65 30000 -12295 1417.15

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