The management of Harling Corporation is considering the purchase of a machine that would cost $90,504 and would have a useful life of 5 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $27,000 per year. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the internal rate of return on the investment in the new machine.
What will be an ideal response?
Factor of the internal rate of return = Investment required ÷ Annual net cash inflow
= $90,504 ÷ $27,000 = 3.352
The factor of 3.352 for 5 years represents an internal rate of return of 15%.
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