EXERCISE 14-15 Internal Rate of Return and Net Present Value
Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine
would cost $137,320, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value.
Required:
1. What is the machine's internal rate of return to the nearest whole percent?
2. Using a discount rate of 14%, what is the machine's net present value? Interpret your results.
3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $37,150 per year. Under these conditions, what is the internal rate of return to the nearest whole percent?