Exercise 25-06 (Video)
Vaughn Inc. wants to purchase a new machine for $35,525, excluding $1,400 of installation costs. The old machine was bought five years ago and had an expected economic life
of 10 years without salvage value. This old machine now has a book value of $2,200, and Vaughn Inc. expects to sell it for that amount. The new machine would decrease
operating costs by $7,500 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value.
Click here to view PV table.
(a)
Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)
Cash payback period
years
(b)
Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the
factor table provided.)
Internal rate of return
(c)
Assuming the company has a required rate of return of 6%, determine whether the new machine should be purchased.
The investment
be accepted.