Reference no: EM132506206

Question 1: BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value.

(a) Determine the cash payback period.

(b) Determine the approximate internal rate of return.

(c) Assuming the company has a required rate of return of 10%, state your conclusion on whether the new machine should be purchased.

Question 2: Vilas Company is considering a capital investment of $190,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $12,000 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

(Round to two decimals)

(a) Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure.

(b) Using the discounted cash flow technique, compute the net present value.