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Question - Daily Ltd. 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 $325,000. The machine is expected to last 5 years and will be depreciated to zero by year 5 using the straight-line method. It will require an investment of $75,000 for the working capital which can be fully recovered at the end of the 5th year. The company's required rate of return is 12 percent. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. The annual cash flows have the following projections.
Year
Cash Flow
1
$95,000
2
100,000
3
120,000
4
150,000
5
90,000
Required -
a) Calculate the payback period (PP) of the purchase of the new machine.
b) Calculate the net present value (NPV) of the new machine.
c) Calculate the Internal rate of return (IRR) of the machine, using the interpolation method.
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