Curtis Industries is considering the purchase of a new machine. It will cost $80,000, last for 8 years, and have no residual value. If purchased, the machine is expected to increase cash inflows by $80,000 per year for 8 years, with $65,000 per year for 8 years in additional cash outlays required to operate the machine. The company uses the straight-line method of depreciation and desires a 12% minimum rate of return.
The present value factors of $1 due eight years from now:
8% 0.540
10% 0.467
12% 0.404
14% 0.351
The annuity present value factors of $1 per year due at the end of each of eight years:
8% 5.747
10% 5.335
12% 4.968
14% 4.639
A) Determine the internal rate of return of this investment.
B) Does this rate of return indicate that the machine should be purchased?