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

Forecast the cash flows given the information and compute IRR using IRR function in excel

IRR = 9.97%

Carson 0 1 2 3 4 5 Investment -350,000 Savings 200,000 300,000 300,000 200,000 225,000 Cost -100,000 -150,000 -175,000 -190,000 -200,000 Salvage 30000 Cash Flows -350,000 100,000 150,000 125,000 10,000 55,000 IRR 9.97%

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