Exercise 12-15 (Algo) Internal Rate of Return and Net Present Value [LO12-2, LO12-3]

Henries Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $102,990, including freight and installation. Henries estimated the new machine would increase the companys cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

Required:

1. What is the machines internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

2. Using a discount rate of 14%, what is the machines net present value? Interpret your results.

3. Suppose the new machine would increase the companys annual cash inflows, net of expenses, by only $26,475 per year. Under these conditions, what is the internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)