BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was purchased five years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine will decrease operating costs by $7,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a six-year period with no salvage value.

Instructions

(a)

Determine the cash payback period.

(b)

Determine the approximate internal rate of return.

(c) Assuming the company has a required rate of return of 10%, state your conclusion on whether the new machine should be purchased.

(CGA adapted)