4. Robin Inc. is considering purchasing a new machine. The following information is available:

Cost of machine                                $200,000 ($100,000 down, $25,000 at the end of years 1-4)

Life                                                         10 years

Salvage value                                     $5,000

Repairs                                                 Year 4, $3,000; Year 8, $2,000

Annual savings                                  Years 1-7, $30,000 per year. Years 8-10, $20,000 per year.

Working capital requirement      $10,000

Old machine – The company has an old machine that it will not need and will sell if they purchase the new machine.

Cost                                                       $160,000

Accumulated depreciation           $140,000

Book value                                          $20,000

Sell for                                                 $16,000

Loss                                                       $4,000

Required: If the required rate of return is 8%, should Robin, Inc. purchase the new machine?

1. Using the net present value method.
2. Using the payback method. The company wants a return within 5 years.

Answer rating: 100% (QA)

A Net present value Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 1 Year 2 25000 25000 Year 3 2500... View the full answer