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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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