Asked by Sergei Glukhov on Jul 01, 2024
Verified
Boxton Corporation's required rate of return is 12%. The company is considering the purchase of a new machine that will save $20,000 per year in cash operating costs. The machine will cost $128,360 and will have a 10-year useful life with zero salvage value. Straight-line depreciation will be used. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the machine's internal rate of return. Would you recommend purchase of the machine?
Straight-Line Depreciation
An operation for dividing the expense of a solid asset through its functional duration in even yearly sums.
Internal Rate of Return
A financial metric used to evaluate the profitability of an investment, representing the interest rate at which the net present value of all cash flows (both positive and negative) from a project or investment equal zero.
- Comprehend and utilize the internal rate of return (IRR) concept for making investment decisions.
- Assess the financial attractiveness of an investment based on its ability to increase sales revenues and reduce operating costs.
Verified Answer
ZK
Zybrea KnightJul 02, 2024
Final Answer :
Factor of the internal rate of return = Investment required ÷ Annual net cash flow= $128,360 ÷ $20,000 = 6.418The factor of the internal rate of return corresponds to an internal rate of return of 9%.The machine should not be purchased because the internal rate of return is less than the company's required rate of return.
Learning Objectives
- Comprehend and utilize the internal rate of return (IRR) concept for making investment decisions.
- Assess the financial attractiveness of an investment based on its ability to increase sales revenues and reduce operating costs.