EXERCISE 13–9 Basic Net Present Value and Internal Rate of Return Analysis [LO1, LO2]
(Ignore income taxes.) Consider each case below independently.
1. Minden Company’s required rate of return is 15%. The company can purchase a new machine at a cost of $40,350. The new machine would generate cash inflows of $15,000 per year and have a four-year life with no salvage value. Compute the machine’s net present value. (Use the format shown in Exhibit 13–1.) Is the machine an acceptable investment? Explain.
2. Leven Products, Inc., is investigating the purchase of a new grinding machine that has a pro- jected life of 15 years. It is estimated that the machine will save $20,000 per year in cash operating costs. What is the machine’s internal rate of return if it costs $111,500 new?
3. Sunset Press has just purchased a new trimming machine that cost $14,125. The machine is expected to save $2,500 per year in cash operating costs and to have a 10-year life. Compute the machine’s internal rate of return. If the company’s required rate of return is 16%, did it make a wise investment? Explain.
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