Question: A company owns a packaging machine, which was purchased three years ago for $56,000. It has a remaining useful life of five years, providing that it has a major overhaul at the end of two more years of life, at a cost of $10,000. Its disposal value now is $20,000; in five years, its disposal value will be $8,000. The cash operating costs of this machine are expected to continue at $40,000 annually.
A manufacturer has offered a substitute machine for $51,000 in cash. The new machine will reduce annual cash operating costs by $10,000, will not require any overhauls, will have a useful life of five years, and will have a disposal value of $3,000.
Required: 1 Calculate the payback period for the new machine.
2. Calculate the accounting rate of return for the new machine
3. Assume that the minimum desired rate of return is 10%, use the net present value technique show whe=her new machine should be purchased.