Question

55%- 10:57 PM Sat May 18 Practice Gradebook ORION Downloadable eTextbook PRINTER VERSION BACK CES Exercise 25-06 (Video) Vaughn Inc, wants to purchase a new machine for $45,800, 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 $2,400, and Vaughn 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. 0) o) 0) 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 Assuming the company has a required rate of return of 7%, determine whether the new machine should be purchased. The investment be accepted. Click if you would like to Show Work for this question: Open Show Work Question Attempts: 0 of 3 used SUBMIT ANSWER SAVE FOR LATER

Answer 1

		$
	Purchase price of new machine	45800
	Add: Installation costs	1500
	Less: expected sale value of old machine	-2400
	Total initial cash outflow	44900
a
Year	Transaction	Cash flow	Cumulative cash flow
0	Initial cash outflow	-44900	-44900
1	Annual savings in operation cost	10000	-34900
2	Annual savings in operation cost	10000	-24900
3	Annual savings in operation cost	10000	-14900
4	Annual savings in operation cost	10000	-4900
5	Annual savings in operation cost	10000	5100
6	Annual savings in operation cost	10000	15100
	The initial cash flow of $ 44,900 is fully recovered in year 5. Then the payback period is 5 years.
	Payback period = 4 years + (12/10,000)x 4,900 = 4.5 years
b
Year	Item	Cash flow	PV factor at 7%	Discounted cash flow at 7%	PV factor at 9%	Discounted cash flow at 9%
0	Initial Cost	(44,900)	1	(44,900)	1	(44,900)
1 - -6	Annual savings in operation cost	10,000	4.76654	47,665	4.48592	44,864
	Net Present Value (NPV)			2,765		(36)
	NPV at 9% discount rate is approximately zero, then the approximate Internal Rate of Return( IRR) = 9%
c	If the required rate of return is 7%, then the NPV is equal to $ 2,765.
	The NPV at 7% interest rate is positive. Therefore, the investment shall be accepted.