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Kalorie Cola is considering buying a special-purpose bottling machine for $28,000. It is expected to have a useful life of 7 years with a zero
Kalorie Cola is considering buying a special-purpose bottling machine for $28,000. It is expected to have a useful life of 7 years with a zero disposal price. The plant manager estimates the following savings in cash-operating costs: YEAR 2 3 4 5 6 7 AMOUNT $10,000 8,000 6,000 5,000 4,000 3,000 3,000 $39.000 Total The Plant Manager argues that, since the total cash savings ($39,000) exceed the outlay ($28,000), Kalorie Cola should definitely purchase the machine. REQUIRED: Calculate whether the bottling machine should be purchased according to the following methods: (i) net present value, and (ii) internal rate of return. Kalorie Cola's required rate of return is 16% p.a. Explain to the Plant Manager why his logic for purchasing the niachine is flawed. Why can't we compare the total cash savings with the machine cost? a
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