Question: An auto repair shop is considering purchasing automated paint-spraying equipment. The company estimates that the equipment will last five years. Each year, it will save the company $4,000 in paint wasted in the current manual spraying operation. It will also reduce labour costs by $40,000. It is estimated that the machine will incur maintenance costs of $2,000 per year. The machine costs $140,000 (installed with all peripherals), and is expected to have a residual value of $10,000 at the end of five years. Top management needs you to determine the internal rate of return for this equipment in order to decide whether to purchase it, and how to fund it.
You may assume that the company income tax rate is 30%, and for this analysis is paid the year in which it is incurred. You may also assume that for tax purposes, the equipment is depreciated at a rate of 20% of its capital cost.
Your answer should be within ± 0.5% of the correct value.