trueSretur Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2,
ID: 2591662 • Letter: T
Question
trueSretur Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2, LO13-3 Hervle's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $102.990, inchuding freight and instaliation. Hermle's estimated the new machine would increase the company's cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful We and no salvage value Click here to view Extilbit 138-1 and Exhibit 1382, to determine the appropriate discount factorts) using table Required: es 1. What is the machine's internal rate of return? (Round your answer to whole decimal place ie. 0.123 should be considered es 12%.) 2, Using a discount rate of 14%, what is the 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $26,475 per year. Under these condtions, what is the internal rate of return? Round your answer to whole decimal place i.e. 0.123 should be considered as s net present value? Interpret your results.Explanation / Answer
Answer 1.
Cost of Machine = $102,990
Annual Cash inflows = $30,000
Useful life = 5 years
Let IRR be i%
NPV = -$102,990 + $30,000 * PVIFA (i%, 5)
0 = -$102,990 + $30,000 * PVIFA (i%, 5)
$102,990 = $30,000 * PVIFA (i%, 5)
3.433 = PVIFA (i%, 5)
Using Present Value Table of an Annuity of $1, i = 14.00%
So, IRR is 14.00%
Answer 2.
Cost of Machine = $102,990
Annual Cash inflows = $30,000
Useful life = 5 years
Discount Rate = 14.00%
NPV = -$102,990 + $30,000 * PVIFA (14%, 5)
NPV = -$102,990 + $30,000 * 3.433
NPV = $0
Company can purchase this machine as NPV is $0, so there is no loss or profit.
Answer 3.
Cost of Machine = $102,990
Annual Cash inflows = $26,475
Useful life = 5 years
Let IRR be i%
NPV = -$102,990 + $26,475 * PVIFA (i%, 5)
0 = -$102,990 + $26,475 * PVIFA (i%, 5)
$102,990 = $26,475 * PVIFA (i%, 5)
3.890 = PVIFA (i%, 5)
Using Present Value Table of an Annuity of $1, i = 9.00%
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