BSU Inc. wants to purchase a new machine for $41,100, excluding $1,000 of instal

Question

BSU Inc. wants to purchase a new machine for $41,100, excluding $1,000 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 $1,700, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $9,000 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. (Refer the below table)

Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.)

2) the annual rate of return on the proposed capital expenditure.

3)Using the discounted cash flow technique, compute the net present value. (Round computations for 15% Discount Factor to 5 decimal places. Round answer to 0 decimal places e.g. 125.)

Explanation / Answer

Initial Investment (Cost of asset and Installation) $       42,100.00 (41100+1000) Less: Disposal Value of old machine $       (1,700.00) Net Cash Outflow $       40,400.00 Calculation of Cash IN flow EVERY YEAR : Cash outflow $                       -   Net Cash Flow $          9,000.00 Cash Payback period Investment/Cash inflow per year 40400/9000 Cash Payback period 4.5 years Calculation of Rate of return:- Decrease in operating Cost-Revenue $          9,000.00 Less:-Depreciation on asset per year $          7,016.67 (42100/6) Net revenue $          1,983.33 Initial Investment $       40,400.00 Rate of return(1983/40400*100) 4.91 % Calculation of NPV:- As there is direct information available about economic life of asset, It is drawn that new asset has life of 6 years only Year (Cash outflow)/Inflow PVAF @15% Present value 0 $              (40,400.00) 1 $     (40,400.00) 1 $                   9,000.00 0.8696 $          7,826.40 2 $                   9,000.00 0.7561 $          6,804.90 3 $                   9,000.00 0.6575 $          5,917.50 4 $                   9,000.00 0.5718 $          5,146.20 5 $                   9,000.00 0.4972 $          4,474.80 6 $                   9,000.00 0.4323 $          3,890.70 NPV $       (6,339.50) ** Cash flows has to be discounted at Required rate of return ** As NPV results to negative figure, New machine can't be purchased

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