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Calculate the internal rate of return for Machine A

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Reference no: EM132563481

Question - Suppose that ABC Ltd is considering purchasing one of three new processing machines. Either machine would make it possible for the company to produce its products more efficiently.

Estimates regarding each machine are provided below:

 

Machine A

Machine B

Machine C

Original cost

$79,000

$110,000

$244,000

Estimated life

7 years

8 years

10 years

Salvage value

Nil

Nil

$30,000

Estimated annual cash inflows

$30,000

$60,000

$58,500

Estimated annual cash outflows

$7,000

$35,000

$18,500

Required -

A. If the projects cannot be repeated, which machine should ABC Ltd choose based on the NPV criteria at an 8% cost of capital?

B. If the projects can be repeated, which machine should ABC Ltd choose based on the NPV criteria at an 8% cost of capital?

C. Calculate the internal rate of return for Machine A? [Hint: internal rate of return is the rate which results in a zero NPV using linear interpolation], and discuss 1 drawback of the IRR against the NPV.

Reference no: EM132563481

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