E24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of instal- lation 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 $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operat- ing costs by $7,000 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. 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.
E24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of instal- lation 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 $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operat- ing costs by $7,000 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. 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:E24-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of instal-
lation 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 $2,000,
and BSU Inc. expects to sell it for that amount. The new machine would decrease operat-
ing costs by $7,000 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.
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.
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