Could you please show calculations? E24-6 BSU Inc. wants to purchase a new machi
ID: 2583628 • Letter: C
Question
Could you please show calculations? E24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of instal- lation costs. The old machine was bought five years ago and had an expected ec life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operat- ing costs by $7.000 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 Instructions (a) Determine the cash payback period. Determine the approximate internal rate of return. Assuming the company has a required rate of return of 10%, state your conclusion on whether the new machine should be purchased. (c) (CGA adapted)Explanation / Answer
a calculation of the payback period 1 purchase value of the machine 29300 2 installation costs 1500 3 sale value of the old machine 2000 4 net cash outflow ( 1 + 2 - 3 ) 28800 years 1 2 3 4 5 6 savings per year 7000 7000 7000 7000 7000 7000 cumulative savings 7000 14000 21000 28000 35000 42000 payback period is the time required to collect the initial cost initial cost 28800 cumulative cash flows till 4 year 28000 balance net come to be collected in 5 th year 28800 - 28000 800 time required to collect the cash flows in 5 th year 800 / 7000 0.11 payback period 5 years + 0.11 years 5.11 years b calculation of the internal rate of return years 0 1 2 3 4 5 6 savings per year -28800 7000 7000 7000 7000 7000 7000 internal rate of return using excel .=irr(cash flows from year 0 to 6 ) 11.98% c the machine should be purchased if the required rate of return is 10 % , as the actual 11.98 % is more than the required rate of return