Question - ALGS Inc. wants to purchase a new machine for $29,800, excluding $1,550 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 ALGS Inc. expects to sell it for that amount. The new machine would decrease operating costs by $8,320 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a five-year period with no salvage value.
Instructions -
(a) Determine the cash payback period.
(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.