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Griffith Corporation Griffith Corporation is considering an investment in a labor-saving machine
Griffith Corporation
Griffith Corporation is considering an investment in a labor-saving machine. Information on this machine follows:
|
Cost |
$30,000 |
|
Salvage value in five years |
$0 |
|
Estimated life |
5 years |
|
Annual depreciation |
$6,000 |
|
Annual reduction in existing costs |
$8,000 |
Refer to Griffith Corporation. What is the internal rate of return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are required.
- 37.5 %
- 25.0 %
- 10.5 %
- 13.5 %
Expert Solution
Answer:
C . 10.5 %
Step-by-Step explanation
Computation of the internal rate of return:
Initial cost = Present value of all future cost savings
$30,000 = Annual cost savings x [(1 - (1 + Internal rate of return)^(number of years))/
$30,000 = $8,000 x [(1 - (1 + Internal rate of return)^(- 5))/ Internal rate of return]
3.75 = [(1 - (1 + Internal rate of return)^(- 5))/ Internal rate of return]
By solving the above equation, we will get the internal rate of return around 10.5%.
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