Kadalai Company makes metal blanks which it sells to metal fabrication and stamping companies. The sales forecasts for the next four years are 500,000 bars a year. The president estimates that he can...

Kadalai Company makes metal blanks which it sells to metal fabrication and stamping companies. The sales forecasts for the next four years are 500,000 bars a year. The president estimates that he can save $1,000 per year in fixed cash operating costs plus $0.05/bar during the next four years if he buys a machine to automate the process at a cost of $90,000. A salvage value of $10,000 is expected at the end of the four-year period. The company’s minimum desired rate of return is 10%. The company’s average tax rate is 20%.         (Adapted © CPA Canada)

Required:

What is the internal rate of return for the investment in the machine? (Hint: Calculate the after tax cash flows using the average tax rate.) new book