Question

Internal Rate of Return Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs $900,000 and will produce net cash inflows of $300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs $775,000 and will produce labor savings of $400,000 and $500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required:________.
1. Calculate the IRR for the first investment. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box). Between % and %. Determine if it is acceptable or not.
2. Calculate the IRR of the second investment. Use 12 percent as the first guess. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box). Between % and %. Comment on its acceptability.
3. What if the cash flows for the first investment are $250,000 instead of $300,000.

Answer 1

Answer:

1. IRR for the first investment: 13%

2. IRR for the second investment: 10%

3. IRR for the first investment give changes in cash flow: 4%

Explanation:

IRR is the discount rate that will bring project's net present value to 0. Apply this, we will calculate IRR in each given scenario:

1. -900,000 + (300,000/IRR)/ [ 1 - (1+IRR)^-4] = 0 <=> IRR = 13%

2. -755,000 + 400,000/(1+IRR) + 500,000/(1+IRR)^2 = 0 <=> IRR = 10%

3. -900,000 + (250,000/IRR)/ [ 1 - (1+IRR)^-4] = 0 <=> IRR = 4%

(all the answers have been rounded to whole percentage values as required in the question).