Exercise 12-15 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 $137,320, including freight and installation. Henries estimated the new machine would increase the companys cash inflows, net of expenses, by $40,000 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 whole decimal place i.e. 0.123 should be considered as 12%.)

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

3. Suppose the new machine would increase the companys annual cash inflows, net of expenses, by only $31,720 per year. Under these conditions, what is the internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.)