Instructions (Round computations 0 decimal places, e.g. 125 and cash payback per
ID: 2348392 • Letter: I
Question
Instructions(Round computations 0 decimal places, e.g. 125 and cash payback period to 1 decimal place, e.g. 10.5 and for internal rate of return to 0 decimal places, e.g. 10.. Round computations for Discount Factor to 5 decimal places.)
(a) Determine the cash payback period. years
(b) Determine the approximate internal rate of return. %
(c) Assuming the company has a required rate of return of 10%, state your conclusion on whether the new machine should be purchased.
The investment be accepted
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Explanation / Answer
(a) Payback Period Year 0 Cashflows = -29300 -1500 + 2000 = -$28800 Year 1 Cashflows = 8000 Year 2 Cashflows = 8000 Year 3 Cashflows = 8000 Year 4 Cashflows = 8000 Year 5 Cashflows = 8000 Payback period = 3 + (28800 - 8000 x 3)/8000 = 3.6 Years (c) NPV Discount factor = 10% Annuity factor for 10% for 5 years = 3.791 NPV = -28800 + 3.791 x 8000 = $1528 Thus, the new machine should be purchased since NPV is positive. The invesment should be accpeted. (b) The discount factor at 13%, annuity factor = 3.517 NPV at 13% = -28800 + 3.517 x 8000 = -$664 Internal rate of return = 10 + 1528/(1528+664) x (13 - 10) = 12% Hope this helps!