BSU Inc. wants to purchase a new machine for $29,500, excluding $1,100 of instal

Question

BSU Inc. wants to purchase a new machine for $29,500, excluding $1,100 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 $1,800, 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.

Explanation / Answer

Initial cash outflow = 29,500 + 1,100 - 1,800 = $28,800

Subsequesnt cash inflows = $7,000

Cash payback period = 28,800 / 7,000 = 4.11 years

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