Vaughn Inc. wants to purchase a new machine for $45,800,
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
$2,400, and Vaughn Inc. expects to sell it for that amount. The new
machine would decrease operating costs by $10,000 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
Click here to view PV table.
Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)
|Cash payback period||years|
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||%|
Assuming the company has a required rate of return of 7%, determine whether the new machine should be purchased.
should/should notbe accepted.
Initial investment = $45,800+1,500-2,400 = $44,900
a. Cash pay back period = Initial investment / Annual cost savings
Cash pay back period = $44,900 / $10,000 = 4.49 years
b. Internal rate of return:
Annual value = 4.49 years
At 4.49 for 6 years = 9%
Hence IRR = 9%
Net present value = Present value of cash inflow - Initial investment
Present value of cash flow = $10,000 * 4.76654 ([email protected]%, 6years) = $47,665
Net present value = $47,665 - $44,900 = $2,765
The investment should be accepted as NPV is positive.
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