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Exercise 24-5 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 $436,900. 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 $103,273 for the next 6 years. Management requires a 10% rate of return on all new investments. (a) Calculate the internal rate of return on this new machine. Should the investment be accepted? (b) Calculate cash payback period, internal rate of return, and apply decision rules.

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Answer:

The internal rate of return is 11%,  the investment will be accepted.  

Payback Period is 5

Explanation:

We use excel or a spreadsheet to calculate this ratio. See document attached.

We must use a cash flow to solve this problem.

At moment 0 we have the investment cost , in this case $436,900. From period 1 to period 6, we have incomes o benefits of $103,273. Then, we calculate the Net cash flow that is the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow to get the IRR.

The decision rules are 3:

Net Present Value (NPV)

Internal Rate of Return (IRR)

Payback Period

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