Question

BSU Inc. wants to purchase a new machine for $31,320, excluding $1,500 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 $2,300, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 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. Determine the cash payback period. (Round cash payback period to 2 decimal places, e... 10.53.) Cash payback period years (b) Determine the approximate internal rate of return. (Round answer to decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return Assuming the company has a required rate of return of 9%, determine whether the new machine should be purchased. The investment pccepted. should should not

Answer 1

New machine cost	31320
Add: Installation costs	1500
Less: Salvage value of old machine	-2300
Net investment cost	30520
a
Net investment cost	30520
Divide by Net annual cash flows	7000
Cash payback period	4.36	years
b
Net investment cost	30520
Divide by Net annual cash flows	7000
PV factor for Internal rate of return	4.36000
The PV factor 4.36 for 6 years is closest to 10%
Internal rate of return = 10%
c
Internal rate of return exceeds 9%
The investment should be accepted.