A machine can be purchased for $10,500, including transportation charges, but in

Question

A machine can be purchased for $10,500, including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate.

a. Determine the relevant after-tax cash flows and prepare a cash flow schedule.

b. Calculate the payback period for the machine.

c. If the project's cost of capital is 10 percent, would you recommend buying the machine?

d. Estimate the internal rate of return for the machine.

Explanation / Answer

Initial Investment = Purchase cost of machine + installation charges

= 10500 + 1500

= $12000

..

Annual Cash flow = (annual cash revenues

Initial Investment = Purchase cost of machine + installation charges

= 10500 + 1500

= $12000

..

Annual Cash flow = (annual cash revenues

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