Reference no: EM132566986

Scenario

The Acme Company is considering investing a total of $30,000,000 in a new production line utilizing more robots than the existing line, which will result in savings in the cost of labor. The cash outlays expected for the new production line are: $20,000,000 now and another $10,000,000 in one year from today. The expected cost savings are $5,000,000 a year starting this year and continuing for the next nine years, for a total of ten years. The Acme Company is not comfortable with estimating cost savings more than ten years into the future, so it is assumed there are no cost savings beyond ten years and that there is no resale value of the equipment and robots after ten years. The Acme Company requires a return on investment of 12% per year, before income taxes.

Question 1: What is the definition on the internal rate of return (IRR)? The IRR for this investment cannot be calculated. Why not?

                      0 Year           1 Year           2 IRR

Cash Inflow 30000000       20000000       10000000 0%