Asked by Claudia Gonzalez on Jun 13, 2024
Verified
(Ignore income taxes in this problem.)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.
Required:
Compute the machine's internal rate of return.Would you recommend purchase of the machine? Explain.
Internal Rate
Commonly denotes the internal rate of return (IRR), the discount rate at which the net present value (NPV) of all cash flows from a specific project is zero.
Cash Operating
The process dealing with the direct cash flows from business operations, emphasizing a company's liquidity in the short term.
Required Rate
The minimum expected return by investors to compensate for the risk of an investment, often used in capital budgeting.
- Determine the internal rate of return (IRR) for investments and recognize its role in investment decision-making.
Verified Answer
AF
Anastasia FredrikeJun 17, 2024
Final Answer :
Factor of the internal rate of return = Investment required ÷ Annual net cash flow
= $128,360 ÷ $20,000 = 6.418
The 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.
= $128,360 ÷ $20,000 = 6.418
The 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
- Determine the internal rate of return (IRR) for investments and recognize its role in investment decision-making.