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Hondai (Ltd) that operate in the automobile industry is considering replacing a machine with a new one that requires a $4200000 investment. The operating cash inflows over the next 9 years will be $740000 per annum and the cash inflow for the 10th year will be $220000. Thereafter the machine will be sold for $400000. The company uses straight-line depreciation. The cost of capital for projects of similar risk is 11%. Note Average profit is $308000.
Ignore taxation.
Required:
Assume a payback period of 6 years. Determine the payback period and state if the investment is acceptable or not.
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