Henries Drapery Service is investigating the purchase of a n

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $125,080, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value.

    

Enter the Excel formula inputs and compute the machine’s internal rate of return.

     

Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $34,700 per year, instead of $40,000 per year. Enter the Excel formula inputs and compute the machine’s internal rate of return.

     

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $125,080, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value.

Solution

Rreq 1: IRR Annual inflows 40000 Annuity present value factor 3.127 (at 18% for 5 years) Present value of inflows 125080 Less: Initial investment 125080 Net present value 0 hence, IRR is 18% Req 2: IRR Annual inflows 34700 Annuity present value factor 3.6046 (at 12% for 5 years) Present value of inflows 125079.6 Less: Initial investment 125080 Net present value 0 IRR is 12%