Exercise $3-18$

Allen Company's required rate of return is $12\%.$ The company is considering the purchase of three machines as indicated below. Consider each machine independently. $($Ignore income taxes in this problem$)$

Required:

$($a$)$ Machine A will cost $$15,000$ and have a life of $8$ years. Its salvage value will be $$1,000$ and cost savings are projected at $$3,000$ per year. Compute the machine's net present value.

$($b$)$ How much would Allen Company be willing to pay for Machine $B$ if the machine promises annual cash inflows of $$6,000$ per year for $10$ years?

$($c$)$ Machine $C$ has a projected life of $12$ years. What is the machine's internal rate of return, to the nearest whole percent, if it costs $$18,000$ and will save $$2,500$ annually in cash operating costs? Would you recommend purchase? Explain.