BSU Inc. wants to purchase a new machine for $35,500, excluding $1,400 of instal

Question

BSU Inc. wants to purchase a new machine for $35,500, 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 $2,200, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,500 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.

Click here to view PV table.

(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. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

(c)

Assuming the company has a required rate of return of 6%, determine whether the new machine should be purchased.

should not

be accepted?

Explanation / Answer

Initial investment = 35500+1400-2200= $34700 a Cash payback period =34700/7500= 4.6 years b PV factor for Internal rate of return =34700/7500= 4.62667 Internal rate of return = 8% c The investment should be accepted

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