Sub: Finance Topic: Capital Budgting
Selection of a machine through NPV
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(Ignore income taxes in this problem.) Allen Company’s required rate of return is 12%. The
company is considering the purchase of three machines as indicated below. Consider each
a. Machine A will cost $15,000 and have a life of 8 years. Its salvage value will be $1,000
and cost savings are projected at $3,000 per year. Compute the machine’s net present
b. How much would Allen Company be willing to pay for machine B if the machine
promises annual cash inflows of $6,000 per year for 10 years?
c. Machine C has a projected life of 12 years. What is the machine’s internal rate of return,
to the nearest whole percent, if it costs $18,000 and will save $2,500 a