Company B wants to purchase a new machine for $40,100, excluding $1,200 of insta

Question

Company B wants to purchase a new machine for $40,100, excluding $1,200 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $8,500 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value.

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(a)

Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.)
Cash payback period years
(b)

Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Internal rate of return %
(c)

Assuming the company has a required rate of return of 7%, determine whether the new machine should be purchased.
The investment shouldshould not be accepted.

Explanation / Answer

POINT B

Point C

Since NPV is positive, machine should be purchased.

POINT A Cash Outflow = 40100+1200-2000 = 39300 Annual Cash Inflow 8500 Life of new Machine 6Years

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