BSU Inc. wants to purchase a new machine for $44,300, excluding $1,200 of instal
ID: 2405198 • Letter: B
Question
BSU Inc. wants to purchase a new machine for $44,300, 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 $1,900, and BSU 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 the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
BSU Inc. wants to purchase a new machine for $44,300, 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 $1,900, and BSU 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 the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
1 Investment cost = 44300+1200-1900= $43600 Cash payback period = 43600/10000= 4.4 years 2 PV factor for Internal rate of return = 43600/10000 = 4.36 Internal rate of return = 10% The investment should be accepted
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