Problem:

A machine can be purchased for $10,500, including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate.

Required:

Question 1: Determine the relevant after-tax cash flows and prepare a cash flow schedule.

Question 2: Calculate the payback period for the machine.

Question 3: If the project's cost of capital is 10 percent, would you recommend buying the machine?

Question 4: Estimate the internal rate of return for the machine.

Note: Show all workings.