Question

< Prev --/2 Question 4 View Policies Current Attempt in Progress BSU Inc. wants to purchase a new machine for $25,880, 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 $1,700, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $6,000 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. (a) 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 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 10%, determine whether the new machine should be purchased The investment be accepted.

Answer 1

(a) Cash Payback Period = Total net investment/Annual net cash inflow

Total net investment = $25880 + $1200 - $1700 = $25380

$25380/$6000 = 4.23 years

(b) Internal Rate of return

Total net investment = PV of Cash inflow

$25380 = PVAF * $6000

PVAF = 4.23

At 11% PVAF = 4.23

Hence IRR = 11%

The investment should be accepted