87) Lake Torrens Boating Company is interested in replacing a moulding machine with a new
improved model. The old machine has a salvage value of $20 000 now and a predicted
salvage value of $4000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in
one year at a predicted cost of $40 000.
The new machine costs $160 000 and has a predicted salvage value of $24 000 at the end of
six years. If purchased, the new machine will allow cash savings of $40 000 for each of the
first three years, and $20 000 for each year of its remaining six-year life.
What is the net present value of purchasing the new machine if the company has a
required rate of return of 14%?
88) Book & Bible Bookstore desires to buy a new coding machine to help control book
inventories. The machine sells for $36 586 and requires working capital of $4000. Its
estimated useful life is five years and will have a salvage value of $4000. Recovery of
working capital will be $4000 at the end of its useful life. Annual cash savings from the
purchase of the machine will be $10 000.
a. Compute the net present value at a 14% required rate of return.
b. Compute the internal rate of return.
c. Determine the payback period of the investment.