Creighton 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.Creighton's income tax rate is 35%.What is the machine's IRR?

Question

Quizplus · Accepted Answer

The IRR is calculated by finding the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. In this case, the cash flows include the initial cost, annual sales, savings, tax effects, and salvage value. The IRR that satisfies these conditions is approximately 19.15%.

Creighton Industries Is Considering the Purchase of a New Strapping