Attractiveness of investments based internal rate of return

Assignment Help Business Economics

Reference no: EM131094546

Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for two years. The bank has agreed to three equal annual payments, with the first payment due at end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics' MARR is 10% compounded annually.

a. What is the internal rate of return of this investment?

b. What is the decision rule for judging the attractiveness of investments based on internal rate of return?

c. Should Aerotron Electronics buy the water filtration system?

Reference no: EM131094546

Questions Cloud

Treasury securities issued heavily indebted sovereign states : Signs of investor uneasiness in continuing to purchase treasury securities issued by heavily indebted sovereign states such as Greece and Spain have triggered a debate in the past about raising the debt ceiling here. “Tea Party” republicans in the Ho..

Aggregate demand and aggregate supply model : Use the dynamics of Aggregate Demand and Aggregate Supply Model: What was the role of the Fed before and after the crisis? should they have done it differently to prevent the crisis? Should commercial banks been allowed to enter in investment banking..

Considering three mutually exclusive alternatives : Final Finishing is considering three mutually exclusive alternatives for a new polisher. Each alternative has an expected life of 10 years and no salvage value. Polisher I requires an initial investment of $20,000 and provides annual benefits of $4,4..

Explain production effect of growth in the labor force : In a two factor, two good heckscher-ohlin context, illustrate and explain the "production effect " of growth in the labor force in a relatively capital-abundant country, other things equal

Attractiveness of investments based internal rate of return : Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. What is the internal rate of return of this investment? What is the decision rule for judging the attrac..

Increase government spending by building more libraries : Suppose that the president has decided to increase government spending by building more libraries. The legislation was rushed through Congress and enacted without any delay. From here, the libraries will take 10 months to plan and 2 years to build. W..

Welcomes continued strengths in the exchange value : The exchange rate of the $ has increased by 20% or more against the currencies of major US trading partners during the past year. Do you think the Fed welcomes continued strengths in the exchange value of the $ at this time? Explain your answer caref..

When fiscal policy is used to manage the economy : When fiscal policy is used to manage the economy, there are a number of factors that can delay its impact. Which of the following is an example of a recognition lag?

Calculate total market surplus before tax applied : Continue to consider the market in which the supply and demand curves are described by the following information: A tax is applied to the market in the amount of $32 per unit. With the tax, sellers now receive a price of $60 per unit sold. You will h..

User Account

All Pages