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Exercise 12-6 (also in your book at end of chapter) BSU Inc. wants to buy a new machine for $29,300 plus $1,500 for installation costs. OLD machine was purchased 5 years ago (useful life of 10 years, no salvage value). The old machine will be sold which will result in a 2,000 loss on the sale. NEW machine will decrease operating costs by $7,000 each year of its useful life. The straight- line depreciation will be used for the new machine for a 6-year period with no salvage value. Instructions (a) Determine the cash payback period. (b) Determine the approximate internal rate of return. (c) Assuming a required rate of return of 10%, should the new machine be purchased? (a) (What amount + or - what amounts) (answer) Total *net investment = 29,300 + 1,500 -2,000 28,800 Annual net cash flow = 7000 Payback period 28,800 / 7,000 4.11 years (* "net" means after you add and or subtract pertinent amounts) (b) Present Value Net annual cash flows 28,800 Less capital investment Net present value 11.98% Ha (c) Yes, the new machine should be purchased because the IRR is 11.98%, meaning it is greater than BSU Inc required rate of return which is only 10% & another reason is because the NPV is positive. your decision ... AND WHY? Page 2 of 4 820 words Focus 108% 10.030