Compute the payback period for the new machine

Reference no: EM131959086

Question: A company owns a packaging machine, which was purchased three years ago for $56,000. It has a remaining useful life of five years, providing that it has a major overhaul at the end of two more years of life, at a cost of $10,000. Its disposal value now is $20,000; in five years, its disposal value will be $8,000. The cash operating costs of this machine are expected to continue at $40,000 annually.

A manufacturer has offered a substitute machine for $51,000 in cash. The new machine will reduce annual cash operating costs by $10,000, will not require any overhauls, will have a useful life of five years, and will have a disposal value of $3,000.

Required: 1 Calculate the payback period for the new machine.

2. Calculate the accounting rate of return for the new machine

3. Assume that the minimum desired rate of return is 10%, use the net present value technique show whe=her new machine should be purchased.

Reference no: EM131959086

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