Chapter 06, Problem 013 Bailey, Inc., is considering buying a new gang punch tha

Question

Chapter 06, Problem 013 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 $120,000 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 Your answer is incorrect. Try again. 0 What is the internal rate of return of this investment? Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2.

Explanation / Answer

Annual net cost savings = $12500 - 2500 = $10000

IRRis a rate at P.V of cash inflows is equals to present value of cash outflows

P.V of cost savings = PV of initial cost

PVAF x 10000 = 120000

PVAF for 15 Yaers = 12

Reffering to annuity table

PVAF @3% = 11.9379

PVAF@2% = 12.8492

IRR = 2% + (12.8492 - 12)/(12.8492 - 11.9379)

= 2.93%

Thus IRR = 2.93%

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