Exercise 24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1

Question

Exercise 24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 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 $2,000, 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. iew the fa For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.) Cash payback period years Determine the approximate internal rate of return. (Round answer to O decimal places, e.g. 10.) Internal rate of return Assuming the company has a required rate of return of 10%, determine whether the new machine should be purchased. The investmentbe accepted

Explanation / Answer

Initial investment = 29300+1500-2000= 28800 Cash payback period = 28800/7000= 4.1 2 PV factor for internal rate of return = 28800/7000= 4.11429 Internal rate of return = 12% The investment should be accepted

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