Question

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Bonita Inc. wants to purchase a new machine for $44.400, 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 Bonita Inc. expects to sell it for that amount. The new machine would decrease operating costs by $10,000 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.g. 10.53.) Cash payback period years 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

Answer 1

Cost of New machinery Add: Installation costs Less: Sale of Old machinery Initial cash outflow $ 44,400.00 $ 1,200.00 $ 2,000.00 $ 43,600.00 Annual savings in costs $ 10,000.00 a) Payback period Initial Investment Annual Cash inflows = $43600 / 10000 4.36 years b) Internal rate of return is the discounting rate at which present values of future cash inflows is equivalent to the Initial cost. PV factor @ Present Value PV factor Present Particulars Amount (a) 10% (b) @ 10% (a xb) @ 11% (c) Values @ 11% Initial investment $ -43,600 1.000 $ -43,600 1.000 $ -43,600 Cash Inflows (savings) 10000 0.909 $ 9,091 0.901 $ 9,009 10000 0.826 $ 8,264 0.812 $ 8,116 10000 0.751 $ 7,513 0.731 $ 7,312 10000 0.683 $ 6,830 0.659 $ 6,587 10000 0.621 $ 6,209 0.593 $ 5,935 10000 0.564 $ 5,645 0.535 $ 5,346 $ 47 $ -1,295 At rate @10% the Present value of Future cash flows and Initial investment is almost equal therefore the correct Internal rate of return (rounded to O decimal places) will be 10% p.a.

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