Chapter 21, Problem 21.20E

Capital budgeting with uneven cash flows, no income taxes. America Cola is considering the purchase of a special-purpose bottling machine for $65,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs:

Year	Amount
1	$25,000
2	22,000
3	21,000
4	20,000
Total	$88,000

America Cola uses a required rate of return of 18% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts.

Calculate the following for the special-purpose bottling machine:

1. 1. Net present value

   Required

2. 2. Payback period
3. 3. Discounted payback period
4. 4. Internal rate of return (using the interpolation method)
5. 5. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)