Robin Inc. is considering purchasing a new machine. The following information is available: Cost of...
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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
Residual value $6,000
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 $25,000
Gain $5,000
Required: If the required rate of return is 10%, should Robin, Inc. purchase the new machine?
- Using the net present value method.
- Using the payback method. The company wants a return within 5 years.
Show all work.
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