Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: $$\begin{array} { l r }
\text { Decreased waste } & \$ 300,000 \
\text { Increased quality } & 400,000 \
\text { Decrease in operating costs } & 600,000 \
\text { Increase in on-time deliveries } & 200,000
\end{array}$$ The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. Which of the following best describes the IRR for this project?

Question

Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: $$\begin{array} { l r } 
\text { Decreased waste } & \$ 300,000 \
\text { Increased quality } & 400,000 \
\text { Decrease in operating costs } & 600,000 \
\text { Increase in on-time deliveries } & 200,000
\end{array}$$ The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. Which of the following best describes the IRR for this project?

Quizplus · Accepted Answer

The total annual cash benefits are $1,500,000. The IRR is the rate that makes the present value of these benefits equal to the $9,000,000 cost. Given the cash flows and cost, the IRR is likely between 10% and 12%.

Bellamy Company Is Considering the Purchase of a Computerized Manufacturing