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The Humboldt Manufacturing Company is considering buying a new machine. Machine A has an estimated useful life of five years, a purchase price of $250,000, and a residual value of $30,000. Machine B has an estimated useful life of 8 years, a purchase price of $350,000, and a residual value of $50,000. Machine B will also require a routine maintenance overhaul at the end of year 5 that will cost $5,000. The company controller has estimated average annual net income of $16,500 for Machine A and $25,000 for Machine B. The cash flows for the two machines are as follows: Machine A Machine B Year Net Cash Inflows Net Cash Inflows 1 $75,000 100,000 2 70,000 90,000 3 65,000 80,000 4 60,000 70,000 5 40,000 50,000 6 40,000 7 30,000 8 30,000 Compute the following for each machine (when necessary, round to two decimal places). a. Compute the payback periods. b. Compute the average rates of return on the investment. c. Compute the Net Present Values assuming the company requires a 12% minimum rate of return. d. Which machine are you inclined to pick based on your answers to a, b, and c? Explain. e. What is the problem with comparing the Net Present Values of these two machines and what other factors should be considered in this analysis? f. Assuming Machine B is sold at the end of year 5, which means that the routine maintenance overhaul would not need to be done. What residual value at the end of year 5 would be needed in order for the company to achieve its 12% rate of return? Show your computation. g. Does your answer in (f) change your answer in (d)? Explain.

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