Spiers Corporation Is Considering the Acquisition of a New Machine

question 69

Essay

Spiers Corporation is considering the acquisition of a new machine that costs $149,040. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $45,000. Gotham evaluates investments by using the internal rate of return and ignores income taxes.
Required:
A. Briefly define the internal rate of return.
B. What relationship holds true at the internal rate of return with respect to discounted cash inflows and discounted cash outflows? With respect to net present value?
C. Compute the machine's internal rate of return.

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Definitions:

Strap

A trading strategy involving the purchase of two call options and one put option with the same strike price and expiration date, expecting a large move in the underlying asset.

Riskless Lending

A theoretical lending scenario where there is no risk of default by the borrower, often used as a concept in economic models.

Exercise Price

The specified price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying asset.

Narrow Range

Refers to a situation where the difference between the high and low prices, values, or figures within a given period is relatively small.