Question 1 Open Show Work Question 1 BSU Inc. wants to purchase a new machine fo

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Question 1

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Question 1

BSU Inc. wants to purchase a new machine for $33,700, 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.

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 11%, determine whether the new machine should be purchased.
The investment

shouldshould not

be accepted. Click if you would like to Show Work for this question:

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Explanation / Answer

Initial investment = 33700+1300-2100= 32900 a Cash payback period =32900/8000= 4.1 b PV factor for Internal rate of return =32900/8000= 4.11250 Internal rate of return =12% c The investment should be accepted.

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