Exercise 25-06

BSU Inc. wants to purchase a new machine for $45,600, excluding $1,200 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $1,900, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $10,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)

Cash payback period

enter the Cash payback period in years rounded to 2 decimal places

years

(b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Internal rate of return

enter the Internal rate of return in percentages rounded to 0 decimal places %

(c) Assuming the company has a required rate of return of 7%, determine whether the new machine should be purchased.

The investment select an option

shouldshould not

be accepted.