Problem 8--Internal Rate of Return The management of Peregoy Corporation is cons

Question

Problem 8--Internal Rate of Return

The management of Peregoy Corporation is considering the purchase of an automated molding machine that would cost $255,552, would have a useful life of 5 years, and would have no salvage value.  The automated molding machine would result is cash savings of $64,000 per year due to lower labor and other costs.

Required

a.       Determine the internal rate of return on the investment in the new automated molding machine.  Show your work!

     b.      If the required rate of return on investments is 12%, is the project acceptable?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -255552 + 64000/(1+r)^1 + 64000/(1+r)^2 + 64000/(1+r)^3 + 64000/(1+r)^4 + 64000/(1+r)^5

Solving for r, we get IRR as 8.00%

Answer is 8%

Part B:

No, the project is not acceptable as IRR is less than the minimum required rate of return.

Thanks.

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