Internal Rate of Return and Net Present Value [LO1, LO2]

Scalia’s Cleaning Service is investigating the purchase of an ultrasound machine for cleaning window blinds. The machine would cost $136,700, including invoice cost, freight, and training of employees to operate it. Scalia’s has estimated that the new machine would increase the company’s cash flows, net of expenses, by $25,000 per year. The machine would have a 14-year useful life with no expected salvage value.

Required:
(Ignore income taxes.)
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 16%. Why do you have a zero net present value?
3. Suppose that the new machine would increase the company’s annual cash flows, net of expenses, by only $20,000 per year. Under these conditions, compute the internal rate of return to the nearest whole percent.