Payback, Net Present Value, and Internal Rate of Return
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Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000. The machine should save the company approximately $70,000 in operating costs per year over its estimated useful life of 10 years. The salvage value at the end of 10 years is expected to be $15,000. (Ignore income tax effects.)
Required:
1. What is the machine's payback period?
2. Compute the net present value of the machine if the cost of capital is 12%.
3. What is the expected internal rate of return for this machine?
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Solution Summary
The solution calculates the Payback, Net Present Value, and Internal Rate of Return of the investment in a new candy-wrapping machine.
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1. What is the machine's payback period?
Initial cost= $370,000
Annual cost saving= $70,000
Therefore, Payback period= 5.29 years =370000/70000
Payback period is the number of years in which the initial investment is recouped
2. Compute the net present value of the machine if the cost of capital is 12%.
Initial cost= $370,000
We need to find the present value of annuity of $70,000
and the present value of the salvage valueof ...
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