EXERCISE 13–10 Internal Rate of Return and Net Present Value [LO1, LO2]
Scalia’s Cleaning Service is investigating the purchase of an ultrasound machine for cleaning win- dow 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 these conditions, compute the internal rate of return to the nearest whole percent.
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