Question

BSU Inc. wants to purchase a new machine for $33,680, 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.

(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 ________%

Answer 1

a)

cash outflow for machine

purchase of new machine	$33,680
installation cost	$1300
book value of old machine	(2100)
Net cash outflow	32,880$

cash pay back period

=cash outflow/ cash saving per year

=32880$/8000$

=4.11 Years.

2.we will find NPV at 2 random rates

=NPV = present value of cash inflow- cash outflow

NPV1 = 10%

years	cash flow	PV FACTOR AT 10%	present value
0	(32880)	1	(32880)
1	8000	0.90909[1/1.10]1	7272.72
2	8000	0.82645[1/1.10]2	6611.6
3	8000	0.75131[1/1.10]3	6010.48
4	8000	0.68301[1/1.10]4	5464.08
5	8000	0.62092[1/1.10]5	4967.36
6	8000	0.56447[1/1.10]6	4515.76
		NPV	1962$	[7272.72+6611.6+6010.48+5464.08+4967.36+4515.76-32880]

NPV2 = 15%

years	cash flow	PV FACTOR AT 15%	present value
0	(32880)	1	(32880)
1	8000	0.86957[1/1.15]1	6956.56
2	8000	0.75614[1/1.15]2	6049.12
3	8000	0.65752[1/1.15]3	5260.16
4	8000	0.57175[1/1.15]4	4574
5	8000	0.49718[1/1.15]5	3977.44
6	8000	0.43233[1/1.15]6	3458.64
		NPV	$(2604.08)	[6956.56+6049.12+5260.16+4574+3977.44+3458.64-32880]

IRR = R1 + [NPV 1*(R2-R1)]/(NPV1-NPV2)

= 0.10+[(1962 (0.15-0.10)]/(1962 - (-2604.08)

=0.10 + (98.1/4566.08)

=0.10+0.02148

=12%