America Cola is considering the purchase of a special- purpose bottling machine for $ 28,000. It is

Question:

America Cola is considering the purchase of a special- purpose bottling machine for $ 28,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs:

Year Amount

1............ $ 12,000

2............ 10,000

3 ............9,000

4 ............8,000

Total ..........$ 39,000

America Cola uses a required rate of return of 20% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year- end except for initial investment amounts.

Calculate the following for the special- purpose bottling machine:

Required

1. Net present value

2. Payback period

3. Discounted payback period

4. Internal rate of return (using the interpolation method)

5. Accrual accounting rate of return based on net initial investment (Assume straight- line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)

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