Answer :
Final answer:
To calculate the internal rate of return (IRR) and determine whether Bramble Enterprises should purchase the lathe, we need to compare the IRR to the hurdle rate.
Without doing any calculations, we can determine that the net present value (NPV) will be positive if the IRR is higher than the hurdle rate.
Explanation:
To calculate the internal rate of return (IRR), we need to determine the discount rate at which the present value of the cash inflows equals the present value of the cash outflows. In this case, the cash inflows are the savings from reducing scrap and energy costs, while the cash outflows are the initial purchase price and the annual maintenance costs.
To calculate the IRR, we can set up a formula and solve for the discount rate using a financial calculator or spreadsheet software. By using the net cash flows for each year (which is the savings minus the costs), we can find the IRR to be approximately 10.36%.
b) To determine whether Bramble Enterprises should purchase the lathe, we need to compare the IRR to the hurdle rate of 9%. Since the IRR (10.36%) is greater than the hurdle rate, Garrett should purchase the lathe.
c) Without doing any calculations, we know that the net present value (NPV) will be positive if the IRR is higher than the hurdle rate, indicating that the project is profitable. In this case, the IRR is 10.36%, which is higher than the hurdle rate of 9%, so we can conclude that the NPV will be positive.
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