Kadalai Company makes metal blanks which it sells to metal fabrication and stamping companies. The sales forecasts
Question:
Kadalai Company makes metal blanks which it sells to metal fabrication and stamping companies. The sales forecasts for the next four years are 500,000 bars a year. The president estimates that he can save $1,000 per year in fixed cash operating costs plus $0.05/bar during the next four years if he buys a machine to automate the process at a cost of $90,000. A salvage value of $10,000 is expected at the end of the four-year period. The company’s minimum desired rate of return is 10%. The company’s average tax rate is 20%.
Required:
What is the internal rate of return for the investment in the machine?
Internal Rate of ReturnInternal 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... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
In this problem the cash flows are a mixture of an annuity Cost savings for 4 years and a lump sum 1...View the full answer
Introduction to Managerial Accounting
ISBN: 978-1259105708
5th Canadian edition
Authors: Peter C. Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan
