Henries Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The

Question:

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $130,400, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by 525,000 per year. The machine would have a 10-year useful life and no salvage value.

Required:

1. Compute the machine’s internal rate of return to the nearest whole percent.

2. Compute the machine’s net present value. Use a discount rate of 14%. Why do you have a zero net present value?

3. Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $22,500 per year. Under these conditions, compute the internal rate of return to the nearest whole percent.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...