Exercise 26-5 Bruno Corporation is involved in the business of injection molding

Question

Exercise 26-5 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 $443,800. 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 $117,268 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table. ackheretontmPovebroductiection molding Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimalplaces as displayed in the factor table provided.) Internal rate of return Should the investment be accepted? The investment be accepted

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

443800=117268/1.0x+117268/1.0x^2+117268/1.0x^3+............+117268/1.0x^6

443800=117268[1/1.0x+1/1.0x^2+............+1/1.0x^6]

[1/1.0x+1/1.0x^2+............+1/1.0x^6]=(443800/117268)

[1/1.0x+1/1.0x^2+............+1/1.0x^6]=3.78449

Hence x=IRR=15%[Also looking at present value of annuity factor(15%,6 years)

Hence since IRR is greater than the required return;the project should be accepted.

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