Clare Company is considering the purchase of some labor saving equipment for its
ID: 2530699 • Letter: C
Question
Clare Company is considering the purchase of some labor saving equipment for its packaging department. The equipment is expected to result in labor cost savings of $50,000 per year for the expected five-year life of the equipment. The cost of the equipment is $120,000 and the desired rate of return is 6%.1. The NPV of the investment for Clare Company is ___________. Is the IRR greater than, equal to or less than the desired rate of return? 2. What will the NPV be if the desired rate of return is 4%? Is the IRR greater than, equal to or less than the desired rate of return? 3. What will the NPV be if the desired rate of return is 8%? Is the IRR greater than, equal to or less than the desired rate of return? Clare Company is considering the purchase of some labor saving equipment for its packaging department. The equipment is expected to result in labor cost savings of $50,000 per year for the expected five-year life of the equipment. The cost of the equipment is $120,000 and the desired rate of return is 6%.
1. The NPV of the investment for Clare Company is ___________. Is the IRR greater than, equal to or less than the desired rate of return? 2. What will the NPV be if the desired rate of return is 4%? Is the IRR greater than, equal to or less than the desired rate of return? 3. What will the NPV be if the desired rate of return is 8%? Is the IRR greater than, equal to or less than the desired rate of return?
Explanation / Answer
Solution 1:
Since the NPV of investment is Positive that is NPV>0, therefore IRR will be greater than Desired rate of return.
Solution 2:
Since the NPV of investment is Positive that is NPV>0, therefore IRR will be greater than Desired rate of return.
Solution 3:
Since the NPV of investment is Positive that is NPV>0, therefore IRR will be greater than Desired rate of return.
Computation of NPV Particulars Amount Period PV Factor @6% Present Value Cash Outflows: Cost of Equipment $1,20,000 0 1 $1,20,000 Present Value of Cash Outflows (A) $1,20,000 Cash Inflows: Labor Cost Savings $50,000 1-5 4.21236 $2,10,618 Present Value of Cash Inflows (B) $2,10,618 Net Present Value (B-A) $90,618