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:

Year Amount

1......................... $10,000

2 ......................... 8,000

3 ......................... 6,000

4 ......................... 5,000

Total .................... $29,000

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