Question

Sunland Inc. wants to purchase a new machine for $37,840, 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 Sunland 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.

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(a)

Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)

Cash payback period enter the cash payback period in years rounded to 2 decimal places years

(b)

Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Internal rate of return enter the internal rate of return in percentages rounded to 0 decimal places %

(c)

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

The investment select an option___be accepted.

Answer 1

Solution a:

Initial investment = $37,840 + $1,300 - $2,100 = $37,040

Annual cash inflows = $8,000

Cash payback period = Initial investment / Annual cash inflows = $37,040 / 8000 = 4.63 years

Solution b:

Present value factor at IRR = Initial investment / Annual cash inflows = $37,040 / 8000 = 4.63

Refer PV Factor table at period 10, this factor falls at IRR = 17%

Solution c:

As IRR is greater than required rate of return, therefore investment should be accepted.

answered by: anonymous