4.2 Use the information provided below to answer the following questions:

4.2.1 Calculate the Internal Rate of Return (expressed to two decimal places) using interpolation. (5 marks)

4.2.2 Should the machine be purchased? Why? (1 marks)

INFORMATION

Leo Limited has identified a new machine that it is considering for purchase. The machine would cost R600 000 and a further amount of R100 000 is payable for its installation. The machine is estimated to have a useful life of five years. At the end of five years, the machine would be donated. It is expected that the new machine would generate cash revenues of R450 000 per year, and its cash operating expenses would total R250 000 per year. The cost of capital is 15%.