Exercise 24-6 Exercise 24-6 BSU Inc. wants to purchase a new machine for $29,300
ID: 2560328 • Letter: E
Question
Exercise 24-6
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.Click here to view PV table.
(a)
Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.)
Cash payback period years
(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.)
Internal rate of return %
(c)
Assuming the company has a required rate of return of 10%, determine whether the new machine should be purchased.
The investment
shouldshould not
be accepted.Explanation / Answer
Initial investment =29300+1500-2000= 28800 a Cash payback period = 28800/7000= 4.1 b Pv factor for Internal rate of return =28800/7000= 4.11429 Internal rate of return = 12% c The investment should be accepted
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