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    Calculating IRR and NPV

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    Scalia's Cleaning Service is investigating the purchase of an ultrasound machine for cleaning window blinds. The machine would cost $136,700, including invoice cost, freight, and training of employees to operate it. Scalia's has estimated that the new machine would increase the company's cash flows, net of expenses, by $25,000 per year. The machine would have a 14-year useful life with no expected salvage value.

    Required:
    (Ignore income taxes)

    1)Compute the machine's internal rate of return to the nearest whole percent.

    2)Compute the machine's net present value. Use a discount rate of 16%.Why do you have a zero net present value?

    3)Suppose that the new machine would increase the company's annual cash flows, net of expenses, by only $20,000 per year. Under the conditions, compute the internal rate of return to the nearest whole percent.

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    https://brainmass.com/business/net-present-value/calculating-irr-and-npv-237846

    Solution Preview

    Solution:

    1) Compute the machine's internal rate of return to the nearest whole percent.
    Annual Cash flow=$25000
    Period=14 year
    Since cash flow is same throughout 14 years.
    It is equivalent to an ordinary annuity with R=$25000, n=14.
    PV factor=Initial outlay/annual cash flow=136700/25000=5.468
    Refer PV factor of ordinary annuity tables for n=14, and PV factor=5.468, we get discount rate=16%
    IRR=16%

    2) Compute ...

    Solution Summary

    Solution describes the steps for calculating internal rate of return and net present value of an investment proposal.

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