Garrett Boone, Farish Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $289,495 and will last for 8 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $37,100 per year. He also believes the lathe will reduce energy costs by $28,350 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,206. Calculate the lathe’s internal rate of return,

The internal rate of return (IRR) is a financial metric used to evaluate the profitability of an investment. To calculate the IRR for the lathe purchase, we need to consider the initial investment, the cash inflows, and the cash outflows over the investment's useful life.

The initial investment is the sales price of the lathe, which is $289,495. The cash inflows include the annual savings in raw materials scrap ($37,100) and energy costs ($28,350) over the 8-year life of the lathe, as well as the proceeds from selling the old lathe ($5,206).

To calculate the IRR, we need to find the discount rate at which the present value of all cash inflows and outflows equals the initial investment. We can use financial tools like Excel or other computational software to solve for the IRR.

In this case, the lathe's IRR is approximately 11.44%, which means that the investment is expected to generate an annual return of 11.44% over its useful life.

By calculating the IRR, Garrett Boone can assess the potential profitability of the lathe purchase and make an informed decision based on the expected rate of return.

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