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## Accounting

 Accounting Basics Cost Accounting Financial Accounting Managerial Accounting Auditing Taxation

Q1) Prince Company's required rate of return is 10%. Company is thinking of buying of three machines, as given below. Consider each machine independently.

Required:

a. Machine A will cost= \$25,000 and have a life of 15 years. Its salvage value will be \$1,000, and cost savings are projected at \$3,500 per year. find out machine's net present value.

b. How much will Prince Company be eager to pay for Machine B if machine promises annual cash inflows of \$5,000 per year for 8 years?

c. Machine C has projected life of 10 years. Determine machine's internal rate of return, to the nearest whole percent, if it costs \$30,000 and will save \$6,000 annually in cash operating costs? Would you suggest  purchase? Describe.

\$1,860

 a Year Amount 10% Factor Present Value Investment required now (\$25,000) 1 (\$25,000) Annual cost savings 1-15 \$3,500 7.606 26,621 Salvage value 15 \$1,000 0.239 239 Net present value \$1,860 b Year Amount 10% Factor Present Value Annual cash inflows 1-8 \$5,000 5.335 \$26,675

As present value of cash inflows is \$26,675, company should be eager to pay up to this amount to acquire machine.

c. Investment required + Net annual cash flow = Factor of internal rate of return

\$30,000 + \$6,000 = 5.000
To nearest whole percent, internal rate of return is 15%.

Machine should be bought, as internal rate of return is greater than required rate of return.

Accounting Basics, Accounting

• Category:- Accounting Basics
• Reference No.:- M919593

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