Based on the information in Problem 9-14, what is the internal rate of return of the investment,
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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Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
The NPV was only 125057 using a 10 required rate of return This suggests ...View the full answer
