Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following information applies to ALL parts of capital budgeting question Daily Ltd. is considering the purchase of a new machine that would increase the

The following information applies to ALL parts of capital budgeting question

Daily Ltd. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $325,000. The machine is expected to last 5 years and will be depreciated to zero by year 5 using the straight-line method. It will require an investment of $75,000 for the working capital which can be fully recovered at the end of the 5th year. The companys required rate of return is 12 percent. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the assets estimated useful life. The annual cash flows have the following projections.

Year

Cash Flow

1

$95,000

2

$100,000

3

$120,000

4

$150,000

5

$90,000

Required:

(a) Calculate the payback period (PP) of the purchase of the new machine

b) Calculate the net present value (NPV) of the new machine

(c) Calculate the Internal rate of return (IRR) of the machine, using the interpolation method

(d) Based on the outcome of the three methods above, determine whether the project be accepted and explain why

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Sound Investing, Chapter 7 - Cash Versus Accrual

Authors: Kate Mooney

1st Edition

0071719296, 9780071719292

More Books

Students also viewed these Accounting questions