BSU Inc. wants to purchase a new machine for $25,900, excluding $1,200 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 $1,700, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $6,000 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.
(a) Determine the cash payback period. (Round cash payback period to 1 decimal place, e.g. 10.5.)
(b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 10. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
(c) Assuming the company has a required rate of return of 10%, determine whether the new machine should be purchased.
Cash payback period
years Internal rate of return
% The investment
be accepted.