Question

BSU Inc. wants to purchase a new machine for $40,070, 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. Click here to view PV table.
(a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period years
(b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. 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 be accepted.

Answer 1

Answer:

4.62  years

8.02%

Explanation:

The payback period is the number of years it would take the investment to recoup itself.

Payback=initial capital outlay/annual cash flow

initial capital outlay is the cost of the new  machine plus installation cost minus the salvage value of the old machine.

initial capital outlay=$40,070+$1,200-$2,000=$ 39,270.00

Annual cash flow is the reduction in operating costs of $8,500 per year

payback =$ 39,270.00/$8,500.00=4.62  years

The internal rate of return is computed in the attached

 

Download xlsx