BSU Inc. wants to purchase a new machine for $32,100, excluding $1,400 of instal

Question

BSU Inc. wants to purchase a new machine for $32,100, excluding $1,400 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 $2,100, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 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. What is the Cash payback period in years. Compute Internal rate of Return. Should the investment be accepted?

Explanation / Answer

Initial investment = ( Purchase price of new machine + Installation cost - Salvage value of old machine ) = $ 32,100 + $ 1,400 - $ 2,100 = $ 31,400

Cash payback period = Initial investment / Annual cost savings = $ 31,400 / $ 7,000 = 4.49 years

Internal Rate of return = 9% ( Using Excel)

The investment should be accepted.

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