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Question - The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $250,000 and is expected to have a useful life of 5 years, with a terminal disposal value of $10,000. Additional working capital of $25,000 is needed to keep the machine running efficiently, but this investment is fully recoverable at the end of the project. The company uses the straight-line depreciation method for its non-current assets, and its required rate of return is 10%. The annual cash flows have the following projections.
Year
Cash Flow
1
$80,000
2
100,000
3
80,000
4
60,000
5
20,000
Required -
(a) Calculate the payback period of the new machine.
(b) Calculate the net present value (NPV) of the new machine.
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