Question

Based on the information in Problem 9-14, what is the internal rate of return of the investment, assuming an inflation rate of 4 percent applicable to labor and costs other than depreciation? Should the company make the investment if its cost of capital is 10 percent?
In Problem 9-14, Edward Laren, an accountant with Tenergy Industries, prepared the following analysis of an investment in manufacturing equipment:
Cost savings:
Labor savings .................. $500.000
Reduction in rework materials.............. 125,000
Other........................ 60,000
Total...................... 685,000
Additional taxes related to cost savings.......... (239,750)
Tax savings related to depreciation of new equipment... 161,000
Annual cash flow................... $ 606,250
Present value at 10 percent for five years......... 2,298,173
Cost of equipment.................. 2,300,000
Net present value.................. ($ 1,827)



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  • CreatedSeptember 23, 2013
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