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Problem 4. Peter Corporation is considering purchasing a machine (Machine Blue) that costs $312,000 and has a residual value of $39,000 at the end of
Problem 4. Peter Corporation is considering purchasing a machine (Machine Blue) that costs $312,000 and has a residual value of $39,000 at the end of a six year estimated life. The minimum rate of return is 12% and estimated annual cost savings from using the machine are $81,000 per year for the first five years and 60,000 in the sixth year. a. Showing the formula (write it out with labels), calculate the payback to the nearest month for Machine Blue. For payback, ignore the residual value. b. Calculate the net present value. Assuming that we accept projects that have a greater return than investment in present value dollars, should Peter invest in the machine? Show your work fully. c. Assume we have an alternate machine (machine Orange) to consider. It would cost us $470,000 with a residual value of 61,000 at the end of a nine year life. The minimum rate of return is still 10%. Annual cost savings from using the alternate machine (Machine Lime) would be 75,000 per year. Calculate the net present value, showing your work fully. d. Should we purchase Machine Blue or Machine Orange and what is the net present value cost of each machine? Show your work and label your answers. Give two reasons for your decision and identify any non-cost factors that might be relevant
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