A machine costing $58,880 is expected to generate net cash flows of $8,000 for each of the next 10 years. 1. Compute the machine’s internal rate of return (IRR). 2. If a company’s hurdle rate is 6.5%, use IRR to determine whether the company should purchase this machine.

A machine costing $58,880 is expected to generate net cash flows of $8,000 for each of the next 10 years. 1. Compute the machine’s internal rate of return (IRR). 2. If a company’s hurdle rate is 6.5%, use IRR to determine whether the company should purchase this machine.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 10PB: Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A machine costing $58,880 is expected to generate net cash flows of $8,000 for each of the next 10 years.
1. Compute the machine’s internal rate of return (IRR).
2. If a company’s hurdle rate is 6.5%, use IRR to determine whether the company should purchase this machine.

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

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