Winterwise Corporation Is Contemplating the Purchase of $181,230 Machine That

question 47

Multiple Choice

Winterwise Corporation is contemplating the purchase of $181,230 machine that is expected to produce annual savings in operating cash flow of $70,000 over the next four years. If Winterwise uses the internal rate of return (IRR) to evaluate new investments and the company has a hurdle rate of 16%, which of the following statements is correct?

• A)The machine's IRR is less than 16%, and the machine should not be acquired.
• B)The machine's IRR is approximately 20%, and the machine should not be acquired.
• C)The machine's IRR is approximately 20%, and the machine should be acquired.
• D)The machine's IRR is approximately 16%, and the machine should be acquired.
• E)The Company's hurdle rate is approximately 20%, and the machine should not be acquired.

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Definitions:

Contribution Margin

The amount by which the sale of a product or service exceeds variable costs, indicating how much it contributes to covering fixed costs.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.

Marginal Costs

The additional cost incurred by producing one more unit of a good or service.

Average Costs

Total costs (fixed and variable) divided by the total quantity of output produced, representing the cost per unit of production on average.