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.
(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.© BrainMass Inc. brainmass.com June 17, 2018, 6:22 pm ad1c9bdddf
1) Compute the machine's internal rate of return to the nearest whole percent.
Annual Cash flow=$25000
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%
2) Compute ...
Solution describes the steps for calculating internal rate of return and net present value of an investment proposal.