In: Accounting
Exercise 12-6 (Video)
BSU Inc. wants to purchase a new machine for $35,525, excluding
$1,400 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 $2,200, and BSU
Inc. expects to sell it for that amount. The new machine would
decrease operating costs by $7,500 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 2 decimal places, e.g. 10.53.)
Cash payback period | 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 | % |
(c)
Assuming the company has a required rate of return of 6%, determine
whether the new machine should be purchased.
The investment
shouldshould not be accepted. |
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