1. The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $71,000. The machine would replace an old piece of equipment that costs $18,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $26,000. The new machine would have a useful life of 10 years with no salvage value.
Required:
Compute the simple rate of return on the new automated bottling machine.
2. The management of Kunkel Company is considering the purchase of a $40,000 machine that would reduce operating costs by $9,500 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 13%.
Required:
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.)