Your company is considering the purchase of a new machine for production
The following numbers show the various cost required
Annual reduction in scrap 7,300.00 (reduction in scrap cost with the new machine)
Cost of new machine 219,000.00
Cost of new software 19,000.00
Labor cost savings per year 116,000.00
Life of machine in years 6.00
Annual maintenance costs 35,000.00
Required overhaul year 3 50,000.00
Salvage value new machine in 6 years 26,000.00
Salvage value of current equip 11,000.00
Annual Required rate of return 12%
REQUIRED
1 Prepare a schedule in good form showing complete details in computing the present value of the cash flows.
2 Compute the present value of the cash flows
3 Compute the NPV of this purchase
4 Compute the internal rate of Return
5 Would you recommend purchasing the new machine? Explain why or who not.
Present Value Analysis
list each cash flow item in its own column
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
5. Would you purchase the new machine? Explain your decision.
2. Present value of cash flows
3. NPV of the purchase
4. Internal rate of return