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Answer :
The internal rate of return of the new lathe is approximately 10.82%.
Cash outflows:
The sales price of the new lathe: $351,601
Cash inflows:
Annual savings in raw material scrap: $33,000
Annual savings in energy costs: $5,000
Salvage value of old lathe: $5,500
PV inflows = ($33,000 + $5,000)/ (1+10%) + ($33,000 + $5,000)/ (1+10%)² + ... + ($33,000 + $5,000)/ (1+10%)[tex]^15[/tex] + $5,500/ (1+10%)[tex]^15[/tex]
PV inflows = $254,498.18
The present value of cash outflows is simply the sales price of the lathe, which is $351,601.
Now we can use the IRR formula to solve for the discount rate:
$254,498.18 = $351,601 / (1 + IR[tex]R)^15[/tex]
IRR = 10.82%
The rate of return is a financial metric used to measure the profitability of an investment over a certain period of time. It is expressed as a percentage and calculated by dividing the net profit or gain of an investment by the initial investment amount and multiplying it by 100. The resulting percentage is the rate of return.
The rate of return is an important indicator of an investment's success or failure. It helps investors determine whether their investment is performing well or not and whether they should continue to hold or sell their investment. However, it is important to note that the rate of return does not account for the risks associated with an investment. High returns may come with high risk, and investors should always consider the potential risks before making any investment decisions.
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