BSU Inc. wants to purchase a new machine for $37,800, excluding $1,300 of instal

Question

BSU Inc. wants to purchase a new machine for $37,800, excluding $1,300 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 $8,000 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. (a) Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.) (b) Determine the approximate internal rate of return.

Explanation / Answer

Initial investment 37800+1300-2100 37000 cash payback period= 37000/8000 4.7 Ans Initial Investment/Cash Inflow For IRR the rate is where NPV=0 So we will do trial and error Cash Saving 8000 PVIFA(9%,6) 4.4859 PV of Cash saving 35887.2 Initial Investment 37000 NPV -1112.8 Cash Saving 8000 PVIFA(8%,6) 4.6229 PV of Cash saving 36983.2 Initial Investment 37000 NPV -16.8 IRR approximate 8% as NPV is close to 0

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