Internal Rate of Return with Uneven Cash Flows Based on the information in Problem 14, what is the internal rate of return of the investment, assuming an inflation rate of 4 percent applicable to labor and costs other than depreciation? Should the company make the investment if its cost of capital is 10 percent?

Data From Problem 14

Net Present Value and Inflation Edward Laren, an accountant with Tenergy Industries, prepared the following analysis of an investment in manufacturing equipment.

Edward's boss, Megan Mangione, reviewed the calculation and made the following observation: "Ed, you've assumed that there won't be inflation, but inflation is built into our 10 -percent cost of capital. I think it's reasonable to assume that labor and costs other than depreciation will increase by four percent per year. Why don't you redo the analysis with that assumption."

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Cost savings: Labor savings Reduction in rework materials Other Total Additional taxes related to cost savings Tax savings related to depreciation of new equipment Annual cash flow Present value at 10 percent for five years Cost of equipment Net present value $ 425,000.00 100,000.00 50,000.00 575,000.00 (201,250.00) 140,000.00 $ 513,750.00 $1,947,523.50 2,000,000.00 (52,476.50)