Q1. Songo currently uses a manufacturing machine that costs $6,500 per year to o

Question

Q1. Songo currently uses a manufacturing machine that costs $6,500 per year to operate. The machine originally cost $12,000 and had a 10 year useful life. The machine is currently 7 years old, after the remaining 3 years, the machine will be disposed of for $5,000. They have the option of purchasing a new machine for $15,000, which also has a useful life of 10 years, but it only costs $2,000 to operate per year. If Songo were to scrap the old machine today, they would earn $7,000.

A)What is the net result, over the remaining 3 years, of keeping the old machine? (round to nearest dollar, no dollar sign, use - to indicate a negative result)

B)What should Songo do?
a.keep the machine
b.replace the machine

Q2. A manufacturer is considering a purchase of a new manufacturing machine. The machine is expected to save $6,500 per year and it costs $15,000 to purchase. The expected useful life of the machine is 3 years and there is no expected residual value at the end of the 3 years. The minimum acceptable rate of return is 12%.
A)What is the approximate Internal Rate of Return?
a.12%
b.14%
c.16%
d.18%

B)Based on the IRR, should the manufacturer purchase the machine?
a.Yes
b.No

Q3. A manufacturer is considering a purchase of a new manufacturing machine. The machine is expected to save $3,000 per year and it costs $8,000 to purchase.
What is the payback period of this machine? (round to one decimal place)

Explanation / Answer

1-IRR of old machine=-181%, IRR of new machine=-154%.

So machine should be replaced because the IRR is better than old machine.

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