Question

Daily Ltd. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $250,000. The machine is expected to last 5 years and will be depreciated to zero by year 5 using the straight-line method. It will require an investment of $75,000 for the working capital which can be fully recovered at the end of the 5th year. The company’s required rate of return is 10 percent and company tax rate is 30%. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. The annual cash flows have the following projections.

Year Cash Flow 1 $95,000 2 100,000 3 120,000 4 150,000 5 90,000

Required: (a) Calculate the payback period (PP) of the purchase of the new machine (b) Calculate the net present value (NPV) of the new machine? (c) Calculate Internal rate of return (IRR) of the machine if the NPV is $166,565 (positive) at 8% discount rate and $7,940 (Negative) at 25% discount rate. (d) Based on the outcome of the three methods above, determine whether the project be accepted and explain why. (

Answer 1

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