LaSalle Industries is considering the purchase of a new strapping machine,which will cost $150,000,plus an additional $10,500 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years.The machine is expected to have a salvage value of $20,000.LaSalle's income tax rate is 35%.What is the machine's IRR?

Question

Quizplus · Accepted Answer

The correct answer is C.The IRR is the discount rate that makes the NPV of the project equal to zero. The NPV is calculated as follows:NPV = -Initial investment + Sum of present values of future cash flowsThe initial investment is $150,000 + $10,500 = $160,500. The present value of the future cash flows is calculated as follows:PV = Sum of (Cash flow / (1 + r)^n)where:r = discount raten = yearThe cash flows are as follows:Year 1: $45,000 + $16,000 - $30,000 = $31,000Year 2: $45,000 + $16,000 - $30,000 = $31,000Year 3: $45,000 + $16,000 - $30,000 = $31,000Year 4: $45,000 + $16,000 - $30,000 = $31,000Year 5: $45,000 + $16,000 - $30,000 + $20,000 = $47,000The IRR is the discount rate that makes the NPV equal to zero. Using a financial calculator, the IRR is found to be 19.15%.

LaSalle Industries Is Considering the Purchase of a New Strapping