Question

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value.1. Compute the machine’s internal rate of return to the nearest whole percent.
2.Compute the machine’s net present value. Use a discount rate of 14%. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)
3. Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $38,090 per year. Under these conditions, compute the internal rate of return to the nearest whole percent.

Answer 1

Answer:

1. IRR = 14%

2. NPV = 3.239

3. 12%

Explanation:

The IRR is the discount rate that equates the after tax cash flows from an investment to the amount invested in a project.

NPV is the present value of after tax cash flows from an investment less the amount invested

NPV and IRR can be calculated using a financial calculator

Cash flow in year zero = -137,320

Cash flow each year from year 1 to zero = 40,000

I = 14%

IRR = 14%

NPV = 3.239

If cash in flow each year from year 1 ro 5 was $38,090, the IRR = 12%

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