Answer to Question #273835 in Accounting for kelly

Question

 Lisa Company's required rate of return is 14%. The company is considering the purchase of a new machine that will save RM10,000 per year in cash operating costs. The machine will cost RM40,000 and will have an eight-year useful life with zero salvage value.

i.       Compute the machine's internal rate of return to the nearest whole percent. Would you recommend purchase of the machine? Explain.

ii.       The company would like to use NPV to evaluate the project now. Compute the machine's NPV, assuming cost of capital is 10%. Would you recommend purchase of the machine? Explain.

Discuss the implications for project investment priority based on your answer in (i) and (ii).      

Answer 1

solved in Excel:

if the IRR value is higher or equal to the cost of capital, then the project is accepted,

if the IRR value is less than the cost of capital, then the project is rejected.

IRR value is less than the cost of capital. NPV > 0 the investment would add value to the firm, the project may be accepted.