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Shkiper50 [21]
3 years ago
11

Industrial Machines needs to purchase a new machine costing $1.25 million. Management is estimating the machine will generate ca

sh inflows of $210,000 the first year and $350,000 for the following four years. If management requires a minimum 10 percent rate of return, should the firm purchase this particular machine based on its IRR?
Business
1 answer:
max2010maxim [7]3 years ago
8 0

Answer:

The firm shouldn't purchase the machine because the IRR is less than the required minimum

Explanation:

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 calcuator

Cash flow in year 0 = $-1.25 million.

Cash flow in year 1 = $210,000

Cash flow in year 2 to 5 = $350,000

IRR = 8.51%

The firm shouldn't purchase the machine because the IRR is less than the required minimum

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

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