1 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. Click here to view Exhibit 78-1 and Exhibit 78-2, to determine the appropriate discount factor(s) using table. 00:52:43 Required: 1. What is the machine's internal rate of return? Note: Round your answer to the nearest whole percentage, L.e. 0.123 should be considered as 12%. 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 $38.090 per year. Under these conditions, what is the internal rate of return? Note: Round your answer to the nearest whole percentage, L.e. 0.123 should be considered as 12%. 1. Internal rate of retur 2. Net present value 3. Internal rate of return 14 % 0 12 %
1 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. Click here to view Exhibit 78-1 and Exhibit 78-2, to determine the appropriate discount factor(s) using table. 00:52:43 Required: 1. What is the machine's internal rate of return? Note: Round your answer to the nearest whole percentage, L.e. 0.123 should be considered as 12%. 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 $38.090 per year. Under these conditions, what is the internal rate of return? Note: Round your answer to the nearest whole percentage, L.e. 0.123 should be considered as 12%. 1. Internal rate of retur 2. Net present value 3. Internal rate of return 14 % 0 12 %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Case Study: Henrie's Drapery Service
Henrie's Drapery Service is considering the purchase of a new machine specifically designed for cleaning and blocking drapes. The details of the investment are as follows:
- **Cost of Machine**: $137,320, which includes freight and installation.
- **Expected Increase in Cash Inflows**: The machine would increase the company’s cash inflows, net of expenses, by $40,000 annually.
- **Lifespan of Machine**: 5 years
- **Salvage Value**: None
To evaluate this investment, Henrie's is using financial metrics such as the internal rate of return (IRR) and net present value (NPV).
### Tasks
1. **Determine the Machine's Internal Rate of Return (IRR)**
- Note: Round your answer to the nearest whole percentage. For example, 0.0123 should be rounded to 12%.
2. **Calculate the Net Present Value (NPV) Using a Discount Rate of 14%**
- Interpret your results from the calculation.
3. **Reassessment Under New Conditions**
- Suppose the machine's annual cash inflows increased by $38,090 instead. Determine the internal rate of return under these circumstances.
- Again, round to the nearest whole percentage, if necessary.
### Calculation Table
- **Internal Rate of Return**
- Original Estimate: 14%
- New Conditions: 12%
- **Net Present Value**
- Calculated at a 14% Discount Rate
Henrie's will make a decision based on these calculations to determine if the machine is a viable investment for increasing operational efficiency and financial return.
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