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algs inc wants to purchase a new machine for 29 300 255038

ALGS Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. 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 ALGS 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.

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