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Pregunta 4 Sin responder aún Se puntúa como 0 sobre 4.00 Marcar pregunta Performance Needlework needs to purchase a new machine costing $1.25 million. Management is estimating the machine will generate cash inflows of $175,000 the first year and $500,000 for the following three years. If management requires a minimum 10 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not? a. No, because the IRR is 10.75 percent b. No, because the IRR is 11.28 percent c. Yes, because the IRR is 10.75 percent d. Yes, because the IRR is 11.28 percent e. The answer cannot be determined as there are multiple IRRs Navegacio cuestionar 1 2 6 7 11 12 16 17 21 22 Terminar inte Siguiente página

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00:01 So, in the part a to calculate the irr internal rate of return using interpolation we need to find the discount rate that equates the present value of the cash inflows to the initial cost of the machine.

00:17 The cash inflows include the reduction in rework cost and the increase in labor cost.

00:23 Let's set up the equation.

00:26 Here present value rework cost reduction plus present value of labor cost increase plus present value which is initial cost is equals to zero.

00:44 Now, we will find first present value of rework cost reduction.

00:51 So, it is equals to negative of dollar twenty thousand multiply by one minus one plus r power minus twelve then here it is divided by r.

01:08 Now, present value of labor cost increase is equals to dollar three thousand multiply by one minus one plus r power minus twelve divide by r then present value of initial cost is equals to negative of dollar one lakh fifty thousand.

01:40 Now, solving this equation for using r interpolation will give us the irr.

01:47 Here is a step by step calculation.

01:49 Start with a lower discount rate.

01:52 Calculate the present value of rework cost reduction and labor cost increasing using the given formulas.

01:58 Sum up the present value as an anchor check if it is equals to zero.

02:03 If it is not equal to zero try a highest discount rate and repeat two three steps.

02:08 Continue this process narrowing down the range until the present value is close to zero.

02:14 Let's perform the calculation.

02:16 So, first we are going to calculate present value of rework cost reduction which is equals to negative of dollar twenty thousand multiply by one minus one plus zero point zero zero four power minus twelve then it is divided by here we can write zero point zero four.

02:44 So, it will be equal to approximately negative of dollar one seven nine one seven one point eight two...

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