Biology Forums - Study Force

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000.

Required:
a.Compute the net present value at a 14% required rate of return.
b.Compute the internal rate of return.
c.Determine the payback period of the investment.

 
a.
Predicted
Cash FlowsYear(s)PV Factor @ 14%PV of Cash Flows
Investment$(36,586)01.000$(36,586)
Working capital needed(4,000)01.000(4,000)
Annual operations10,0001-53.43334,330
Working capital returned4,00050.5192,076
Salvage value4,00050.5192,076
Net present value$(2,104)

b.Trial and error is required. Because net present value is negative in part a, the internal rate of return is less than 14%. Start by trying 12%.

Predicted
Cash FlowsYear(s)PV Factor @ 12%PV of Cash Flows
Investment$(36,586)01.000$(36,586)
Working capital needed(4,000)01.000(4,000)
Annual operations10,0001-53.60536,050
Working capital returned4,00050.5672,268
Salvage value4,00050.5672,268
Net present value$-0-

With a zero net present value, the internal rate of return is 12%.

c.Payback period = ($36,586 + $4,000)/$10,000 = 4.06 years.

Oh god, I was lost before coming here. Thanksss

Great, make sure you mark the topic solved, it hides it from other eyes :)