Spooked is a Halloween decorations manufacturer planning to purchase a new packing machine for $120,000 with a useful life of 15 years and a terminal value of $10,000. Savings due to the machine are expected to be $23,000 per year, however, parts of the machine must be replaced every year so a working capital investment of $5,000 must be maintained. This amount will be recoverable upon disposal. Required rate of return is 12%. All cash flows occur at year-end except for the initial investment. Ignore income taxes in your analysis.

1. Calculate NPV

2. Describe two methods to determine the IRR.

3. Without using the methods in requirement 2, state whether the IRR will be lower or higher than 9%. How do you know?

4. Calculate AARR based on net initial investment.