BSU Ltd. wants to purchase a new machine for £29,300, excluding £1,500 of installation costs. The old machine was purchased five years ago and had an expected economic life of 10 years with no residual value. This old machine has a book value of £2,000, and BSU Ltd. expects to sell it for that amount. The new machine will decrease operating costs by £7,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a six-year period with no residual 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.