1. Bruno Corporation is involved in the business of injection molding of plastics. It is...
Question:
1. Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $443,700. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $117,242 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view the PV table.
Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
| Internal rate of return | % |
Should the investment be accepted?
The investment should
| should not |
| be accepted. |
2. Pierre?s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $271,000. A new salon will normally generate annual revenues of $64,015, with annual expenses (including depreciation) of $41,200. At the end of 15 years, the salon will have a salvage value of $80,000.
Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.)
| Annual rate of return | % |
Internal Rate of Return:
The internal rate of return is a tool used to assess the desirability of a new investment. The technique calculates the rate of return using the cash flows and compares this rate to the required rate to decide if the project should be accepted or not.
Answer and Explanation: 1
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Bruno Corporation
You can find this on a financial calculator with the following inputs:
| CFj | -443,700 |
| CFj | 117.242 |
| CFj | 117.242 |
| CFj | 117.242 |
| CFj | 117.... |
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Internal Rate of Return Method: Definition & Calculation
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