ABC Ltd. is considering the acquisition of a new machine for its production process. The machine will
Question:
ABC Ltd. is considering the acquisition of a new machine for its production process. The machine will cost $250,000 and is expected to have a useful life of 10 years. The estimated salvage value of the machine at the end of its useful life is $25,000. The machine is expected to generate annual cash inflows of $40,000 for the first 6 years and $60,000 for the remaining 4 years. ABC Ltd. requires a minimum rate of return of 12% on its investments.
(a) Calculate the net present value (NPV) of the investment in the new machine.
(b) Calculate the internal rate of return (IRR) of the investment in the new machine.
(c) Based on your calculations in parts (a) and (b), advise ABC Ltd. on whether or not to proceed with the investment.
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ