Question

A machine that costs $12,000 is expected to operate for 10 years. The estimated salvage value at the end of 10 years is $0. The machine is expected to save the company $2,331 per year before taxes and depreciation. The company depreciates its assets on a straight-line basis and has a marginal tax rate of 40 percent. The firm's cost of capital is 14 percent.

What is the internal rate of return (IRR) for the machine?
discount rate of 10% and $6.4177 at the discount rate of 8.7%

Answer 1

The internal rate of return (IRR) for the machine is approximately 15.53%, which is higher than the firm's cost of capital of 14%. Therefore, investing in the machine would be considered profitable for the company.

Step-by-step explanation:

The internal rate of return (IRR) for the machine can be calculated by finding the discount rate at which the present value of cash inflows equals the initial cost of the machine. In this case, the cash inflows are the savings of $2,331 per year before taxes and depreciation for 10 years. The initial cost of the machine is $12,000.

Using a financial calculator or spreadsheet software, the IRR can be calculated to be approximately 15.53%. This means that the machine will generate an effective rate of return of 15.53%, which is higher than the firm's cost of capital of 14%. Therefore, investing in the machine would be considered profitable for the company.