Based on the information in Problem 9-14, what is the internal rate of return of the investment, assuming an inflation rate of 4 percent applicable to labor and costs other than depreciation? Should the company make the investment if its cost of capital is 10 percent?
In Problem 9-14, Edward Laren, an accountant with Tenergy Industries, prepared the following analysis of an investment in manufacturing equipment:
Cost savings:
Labor savings ..................$500.000
Reduction in rework materials..............$125,000
Other........................$60,000
Total......................$685,000
Additional taxes related to cost savings..........$239,750
Tax savings related to depreciation of new equipment...$161,000
Annual cash flow................... $606,250
Present value at 10 percent for five years.........$2,298,173
Cost of equipment..................$2,300,000
Net present value.................. $1,827