Winterwise Corporation is contemplating the purchase of $181,230 machine that is expected to produce annual savings in operating cash flow of $70,000 over the next four years. If Winterwise uses the internal rate of return (IRR) to evaluate new investments and the company has a hurdle rate of 16%, which of the following statements is correct?

Question

Quizplus · Accepted Answer

To determine whether or not to acquire the machine, we need to compare the machine's IRR with Winterwise's hurdle rate of 16%. If the IRR is greater than 16%, then the investment should be made. If the IRR is less than 16%, the investment should not be made.

To calculate the IRR, we need to find the discount rate that makes the net present value (NPV) of the machine's savings over 4 years equal to its initial cost of $181,230. Using a financial calculator or spreadsheet, we can find that the IRR of the machine is approximately 20%.

Since the IRR is greater than Winterwise's hurdle rate of 16%, the machine should be acquired. Therefore, the correct answer is C.

Winterwise Corporation Is Contemplating the Purchase of $181,230 Machine That