Question

Zachary Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,287,000 per year. The cost of the equipment is $9,187,846.67. Zachary expects it to have a 11-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required:
a. Calculate the internal rate of return of the investment opportunity. (Do not round intermediate calculations.)
b. Indicate whether the investment opportunity should be accepted.
1. Internal Rate of Return
2. Should the investment opportunity be accepted?

Answer 1

a) IRR

IRR = 9%

b)

Since the IRR is less than the hurdle rate , the project should be rejected. An IRR with higher than the hurdle rate implies that the project would decrase the wealth of ths shareholders

Step-by-step explanation:

IRR = a% + ( NPVa/(NPVa + NPVb)× (b-a)%

NPV = PV of annual savings - initial cost

PV of annual savings = A× (1- (1+r)^(-n) )/r

A- annual savings in operating cost , r- rate of return, n- number of years

NPVa

PV of annual savings = 1,287,000 × (1- 1.15^(-11))/0.15= 6,735,787.15

NPV = 6,735,787.15 - 9,187,846.67.= 2,452,059.52

NPVb

PV of annual savings = (1,287,000 × (1- 1.03^(-11))/0.03=11908127.23

NPV b = 11908127.23 -9187846.67 =2720280.564

IRR = 3% + ( 2720280.564 /(2720280.564 +2,452,059.52) )× (15-3)%

IRR = 9%

Since the IRR is less than the hurdle rate , the project should be rejected. An IRR with higher than the hurdle rate implies that the project would decrase the wealth of ths shareholders

Answer 2

IRR = 8%

Don't accept the project

Step-by-step explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator:

Cash flow in year 0 = -9,187,846.67

Cash flow each year from year 1 to 11 = 1287000

IRR = 8%

Because the IRR is less than the hurdle rate, the project shouldn't be accepted.

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you