Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $102,990, including freight and installation. Henrie’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 life and no salvage value.

Required:
a. Compute the machine's internal rate of return to the nearest whole percent.
b. Compute the machine's net present value. Use a discount rate of 16%. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)
c. Suppose that the new machine would increase the company's annual cash inflows, net of expenses, by only $41,000 per year. Under these conditions, compute the internal rate of return to the nearest whole percent.

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ewomazinoade ewomazinoade · Answer 1 · 2020-06-10T02:30:07+02:00

Answer:

A. 14%

B. NPV = $-4,761.19

C. 28%

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator:

Cash flow in year 0 = $-102,990

Cash flow each year from year one to five = $30,000

IRR = 14%

The net present value is the present value of after tax cash flows from an investment less the amount invested.

Npv can be calculated using a financial calculator:

Cash flow in year 0 = $-102,990

Cash flow each year from year one to five = $30,000

I = 16%

NPV = $-4,761.19

IRR if cash flow is $41,000

Cash flow in year 0 = $-102,990

Cash flow each year from year one to five = $41,000

IRR = 28%

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you