Question

Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $430,300. The company believes that with this new machine, it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $98,800 for the next 6 years. Management requires a 10% rate of return on all new investments
Required:
a. Calculate the internal rate of return on this new machine. Should the investment be accepted?
b. Calculate cash payback period, internal rate of return, and apply decision rules.

Answer 1

Answer:

10%

Yes

4.36 years

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 = $-430,300

Cash flow each year from year one to six = $98,800

IRR =10%

The project should be accepted because the IRR is equal to the required rate of return

Cash payback calculates how long it takes for the amount invested in a project to be recovered from the cumulative cash flow.

Cash payback = amount invested / cash flow =

$430,300 / $98,800 = 4.36 years

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