Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The ...

a.
   Predicted   Year or   PV   PV of
   cash flows   years   factor   cash flows
Investment   $(36,586)   0   1.000   $(36,586)
Working capital needed   (4,000)   0   1.000   (4,000)
Annual operations   10,000   1-5   3.433   34,330
Working capital returned   4,000   5   0.519   2,076
Salvage value   4,000   5   0.519      2,076
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 percent. Start by trying 12 percent.

   Predicted   Year or   PV   PV of
   cash flows   years   factor   cash flows
Investment   $(36,586)   0   1.000   $(36,586)
Working capital needed   (4,000)   0   1.000   (4,000)
Annual operations   10,000   1-5   3.605   36,050
Working capital returned   4,000   5   0.567   2,268
Salvage value   4,000   5   0.567   2,268
Net present value            $-0-

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

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