Question
The Zone Company is considering the purchase of a new machine at a cost of $1,040,000. The machine is expected to improve productivity and thereby
The Zone Company is considering the purchase of a new machine at a cost of $1,040,000. The machine is expected to improve productivity and thereby increase cash inflows by $250,000 per year for 7 years. It will have no salvage value. The company requires a minimum rate of return of 12 percent on this type of capital investment. (Ignore income taxes for this problem.)
Required:
1. Determine the project's estimated internal rate of return (IRR), rounded to the nearest tenth of a percent. (Note: PV annuity factors for 7 years: @ 10%= 4.868; @ 11% = 4.712; @ 12% = 4.564; @ 13% = 4.423; @ 14% = 4.288; @15% = 4160; and, @ 20% = 3.605.)
2. What is the estimated accounting rate of return (ARR) (on initial investment) for the proposed project? Round your answer to 1 decimal place, e.g., 0.1224 = 12.2%.
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