QUESTION 1

Net Present Value, Annual cash Flow, Internal Rate of Return

King Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.)

Required:

1. Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Calculate the machine's net present value.

2. How much should King Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years?

c) Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to King Company to purchase Machine C? Explain.