Cases in Cost Management 3rd Edition by John Shank

Exercise 2

One can view the production and leasing of an (automatic) attaching machine as a multi-period "annuity." Money is spent in year zero in order to generate a stream of cash flows (positive net cash flows, hopefully) over an average of ten years. After ten years, a machine is renovated and then generates positive cash flows again for another ten years, on average. Try to structure the time-phased cash flows for this annuity for an "average" automatic attaching machine using 1986 costs and prices. Estimate the Internal Rate of Return (Economic Rate of Return) for the annuity. How does this calculation change your thinking, if at all, about the profitability of the attaching machines segment of the business