Answer:
4.49 years
IRR = 8.97% or 9% approximately
The machine should be purchased because the IRR is greater than the required return
Explanation:
Net investment cost = Cost of new machine - salvage value of old machine + tax (salvage value of old machine - book value of old machine)
cost of the new machine = cost of the machine + installation cost
$45,600 + $1,200 = $46800
Net investment cost = $46800 - $1,900 + 0 = $44,900
Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows
Payback period = Amount invested / cash flow
44,900 / 10,000 = 4.49 years
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 with a financial calculator
Cash flow in year 0 = -44,900
Cash flow each year from year 1 to 6 = $10,000
IRR = 8.97% or 9% approximately
The machine should be purchased because the IRR is greater than the required return
To find the IRR using a financial calculator:
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.
