(LO 1, 4) BTMS Inc. wants to purchase a new machine for $30,000. Installation costs are $1,500. 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 $2,000, and BTMS Inc. expects to sell it for that amount. The new machine would decrease operating costs by $8,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a five-year period with no salvage value.
Instructions
a. Determine the cash payback period.
b. Determine the approximate internal rate of return.
c. Assuming the company has a required rate of return of 10%, state your conclusion on whether the new machine should be purchased.
(CGA adapted)
Calculate payback period, internal rate of return, and apply decision rules.
