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 $436,300. 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 $106,119 for the next 6 years. Management requires a 10% rate of return on all new investments.

Calculate the internal rate of return on this new machine. Should the investment be accepted?

Answer 1

Answer:

The IRR is 12%

The project should be accepted since the IRR is greater than the required rate of return

Explanation:

The internal rate of return is the rate of return on an investment in which the present value of cash inflows equal the initial cash outflow in year zero.

In other words,an internal rate of return is a breakeven return on investment.

By breakeven I mean a rate of return that gives no loss or gain on the investment.

The IRR can be computed using the excel formula IRR

=IRR(values)

the values are the cash flows(both inflow and outflow) from first of day of project till the end of the project.

IRR=12%

Find attached.