Question 1 Bailey, Inc., is considering buying a new gang punch that would allow

Question

Question 1 Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $70,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,500 per year using the gang punch, but raw material costs would decrease $12,500 per year. MARR is 5%/year. Click here to access the TVM Factor Table Calculator What is the internal rate of return of this investment?

Explanation / Answer

internal rate of return:

at IRR , NPV = 0

NPV = present value of cash inflow - present value of cash outflow = 0

(12500 - 2500) *PVAF (R, 15 years) - 70000 = 0

PVAF (R, 15 years) = 70000 / 10000

PVAF (R, 15 years) = 7

from TVM annuity factor table ,

R is between 11% and 12%

by interpolation,

at 11 % r = 7.1909

at 12% r =6.8109

(7.1909 - 7) / (6.8109 - 7) = (11 - x) / (12-x)

. 0.1909 * (12 - x) = (11-x) * (-0.1891)

2.2908 - .1909x = - 2.0801 + .1891x

- 0.38 x = - 4.3709

x = 11.50%

therefore , IRR = 11.50%

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