(Ignore income taxes in this problem

Accounting Mar 12, 2021

(Ignore income taxes in this problem.) Allen Company's required rate of return is 14%. The company is considering the purchase of a new machine that will save $10,000 per year in cash operating costs. The machine will cost $40,000 and will have an 8-year useful life with zero salvage value. Straight-line depreciation will be used.

What is the machine's internal rate of return to the nearest whole percent?

Would you recommend purchase of the machine? Explain.

Expert Solution

Internal rate of return (IRR) = 19%

Since, the IRR is greater than the required return (14%). So, the machine should be purchased.

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