Purchase Solution

# Capital Budgeting Decisions with uneven cash flows

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Capital budgeting with uneven cash flows, no income taxes.

Southern Cola is considering the purchase of a special-purpose bottling ma chine for \$23,000, It is expected to have a useful life of four years with a \$0 terminal disposal value. The plant manager estimates the following savings in cash operating costs:

____Year_____Amount

_____1______\$10,000
_____2________8,000
_____3________6,000
_____4________5,000

Total_______\$29,000

Southern Cola uses a required rate of return of 16% in its capital budgeting decisions. Ignore income taxes in your analysis,

Compute the following:

1. Net present value
2. Payback period
3. Internal rate of return
4. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation.
Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)

##### Solution Summary

The solution calculates Net present value, Payback period, Internal rate of return, Accrual accounting rate of return based on net initial investment.

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