Prince Company\'s required rate of return is 10%. The company is considering the

Question

Prince Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.)

Required: a) Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Calculate the machine's net present value.

b) How much should Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years?

c) Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to Prince Company to purchase Machine C? Explain.

Explanation / Answer

Ans.A Year Cash Flow Cost Saving Total PVAF10% Amount 0 ($25,000) ($25,000) 1.0000 ($25,000) 1 $3,500 $3,500 0.9091 $3,182 2 $3,500 $3,500 0.8264 $2,893 3 $3,500 $3,500 0.7513 $2,630 4 $3,500 $3,500 0.6830 $2,391 5 $3,500 $3,500 0.6209 $2,173 6 $3,500 $3,500 0.5645 $1,976 7 $3,500 $3,500 0.5132 $1,796 8 $3,500 $3,500 0.4665 $1,633 9 $3,500 $3,500 0.4241 $1,484 10 $3,500 $3,500 0.3855 $1,349 11 $3,500 $3,500 0.3505 $1,227 12 $3,500 $3,500 0.3186 $1,115 13 $3,500 $3,500 0.2897 $1,014 14 $3,500 $3,500 0.2633 $922 15 $3,500 $1,000 $4,500 0.2394 $1,077 $1,861 Ans B Price to be paid= Annual Cash flow/PVAF10%,8years $5000/5.3349 937.2246902 Ans C Price to be paid= Annual Cash flow/PVAFX%,8years 31286=6000/PVAF X%,8years

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