Sheridan Inc. wants to purchase a new machine for $44,300, excluding $1,500 of installation costs. The old machine was purchased 5 years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,200, and Sheridan Inc. expects to sell it for that amount. The new machine will decrease operating costs by $10,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a 6-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period 4.36 years (b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return % (c) Assuming the company has a required rate of return of 9%, determine whether the new machine should be purchased. The investment should be accepted.

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
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Sheridan Inc. wants to purchase a new machine for $44,300, excluding $1,500 of installation costs. The old machine was purchased 5
years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,200, and
Sheridan Inc. expects to sell it for that amount. The new machine will decrease operating costs by $10,000 each year of its economic
life. The straight-line depreciation method will be used for the new machine for a 6-year period with no salvage value.
Click here to view the factor table.
(a)
Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)
Cash payback period
4.36
years
(b)
Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes,
use 5 decimal places as displayed in the factor table provided.)
Internal rate of return
%
(c)
Assuming the company has a required rate of return of 9%, determine whether the new machine should be purchased.
The investment should
be accepted.
Transcribed Image Text:Sheridan Inc. wants to purchase a new machine for $44,300, excluding $1,500 of installation costs. The old machine was purchased 5 years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,200, and Sheridan Inc. expects to sell it for that amount. The new machine will decrease operating costs by $10,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a 6-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period 4.36 years (b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return % (c) Assuming the company has a required rate of return of 9%, determine whether the new machine should be purchased. The investment should be accepted.
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