Capital budgeting with uneven cash flows, no income taxes. Southern Cola is considering the purchase of a special-purpose bottling machine for $23,000. 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:

Southern Cola uses a required rate of return of 16% 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:

1. Net present value

2. Payback period

3. Internal rate of return

4. 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 ofreturn.)

Transcribed Image Text:

Year Amount $10,000 2 8,000 6,000 5,000 $29,000 Total 3. 4)