ALGS Inc. wants to purchase a new machine for $30,000, excluding $1,500 in installation costs. The old

Question:

ALGS Inc. wants to purchase a new machine for $30,000, excluding $1,500 in installation costs. The old ma- chine 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) Calculate the annual rate of return.

(d) State your conclusion on whether the company should purchase the new machine.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...