Boxton Corporation's required rate of return is 12%. The company is considering the purchase of a new machine that will save $20,000 per year in cash operating costs. The machine will cost $128,360 and will have a 10-year useful life with zero salvage value. Straight-line depreciation will be used. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the machine's internal rate of return. Would you recommend purchase of the machine?
What will be an ideal response?
Factor of the internal rate of return = Investment required ÷ Annual net cash flow
= $128,360 ÷ $20,000 = 6.418
The factor of the internal rate of return corresponds to an internal rate of return of 9%.
The machine should not be purchased because the internal rate of return is less than the company's required rate of return.
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