Internal Rate of Return Analysis. Heston Farming Company would like to purchase a harvesting machine for $100,000. The machine is expected to have a life of 4 years, and a salvage value of $20,000. Annual maintenance costs will total $28,000. Annual savings are predicted to be $60,000. The companys required rate of return is 11 percent (this is the same data as the previous exercise).

Required:

Use trial and error to approximate the internal rate of return for this investment proposal.

Should the company purchase the harvesting machine? Explain.

Internal Rate of Return Analysis

a.

%

%

Cash Flow

Present

Present

Item Description

In (Out)

Factor

Value

Factor

Value

Purchase price (today)

*

*

Annual maintenance costs

(years 14)

**

**

Annual savings (years 14)

**

**

Salvage value

(end of year 4)

*

*

Net present value

*

Because this is not an annuity, use Figure 8.9 in the Appendix.

**

Because this is an annuity, use Figure 8.10 in the Appendix.

b.