Answer:
(a) Payback period: 4.6 years;
(b) IRR: 8.45%;
(c) NPV = $2,180; machine should be purchased.
Explanation:
(a)
We have net investment outlay = Purchase cost of new machine + Installation cost of new machine - Proceed from selling old machine = 35,500 + 1,400 - 2,200 = $34,700
Payback period = Initial investment outlay/ Cost saving per year = 34,700/7,500 = 4.6 years.
(b)
IRR is the discount rate that brings NPV of the project to zero. Thus, we have:
-34,700 + (7,500/IRR) x (1- (1+IRR)^-6) = 0 <=> IRR = 8% (Round to 0 decimal places.
(c)
NPV of the project is calculated at 6% required rate of return as: -34,700+ (7,500/6%) x (1- (1+6%)^-6) = $2,180.
Thus, new machine should be purchased.
