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.

Required:

What is the net present value of purchasing the new machine if the company has a

required rate of return of 14%?

87)

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.

Required:

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.

88)

35

 

 

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