ST Manufacturing Ltd is evaluating an investment of a machine that cost $200,000. With the new machine, the firm’s annual cash inflow will increase by $40,000 every year for the next 7 years. At the end of the 7 years, the company will scrap the machine and do not expect to receive any salvage value for it. Given the firm’s cost of capital is 6%, calculate the internal rate of return (IRR) of this investment. Should the firm purchase the machine? Give your reason(s).

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A: The question is based on the concept Net Present Value

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A: YEAR CASH FLOW  COST OF CAPITAL 12% 0 300000 1 450000 2 710000

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A:

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A: The formula to compute payback period as follows:

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A:

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.