Bowser Company's required rate of return is 14%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.) Required: Machine A will cost $20,000 and will have a useful life of 15 years. Its salvage value will be $1,800, and cost savings are projected at $4,000 per year. Calculate the machine's net present value. How much should Bowser Company be willing to pay for Machine B if the machine promises annual cash inflows of $6,000 per year for eight years? Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $40,000 and will save 7,000 annually in cash operating costs? Would you recommend to Bowser Company to purchase Machine C? Explain.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Bowser Company's required rate of return is 14%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.)


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  1. Machine A will cost $20,000 and will have a useful life of 15 years. Its salvage value will be $1,800, and cost savings are projected at $4,000 per year. Calculate the machine's net present value.
  2. How much should Bowser Company be willing to pay for Machine B if the machine promises annual cash inflows of $6,000 per year for eight years?
  3. Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $40,000 and will save 7,000 annually in cash operating costs? Would you recommend to Bowser Company to purchase Machine C? Explain.

 

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