A machine can be purchased for $10,500, including transporta¬tion charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash reve¬nues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate. Determine the relevant after-tax cash flows and prepare a cash flow schedule.
I. Use the information in Problem 10 to do the following: a. Calculate the payback period for the machine.
II. If the project's cost of capital is 10 percent, would you recommend buying the machine?
III. Estimate the IRR for the machine.