Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 39

Internal Rate of Return
Manzer Enterprises is considering two independent investments:
A new automated materials handling system that costs $900,000 and will produce net cash inflows of $300,000 at the end of each year for the next four years.
A computer-aided manufacturing system that costs $775,000 and will produce labor savings of $400,000 and $500,000 at the end of the first year and second year, respectively.
Manzer has a cost of capital of 8 percent.
Required:
1. Calculate the IRR for the first investment and determine if it is acceptable or not.
2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess.
3. What if the cash flows for the first investment are $250,000 instead of $300,000?