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Unifying Concepts: Payback & Internal Rate of Return

The management of Kitchen Shop is thinking of buying a new drill press to aid in adapting parts for different machines. The press is expected to save Kitchen Shop $8,000 per year in costs. However, Kitchen Shop has an old punch machine that isn't worth anything on the market and that will probably last indefinitely. The new press will last 12 years and will cost $41,595. (Ignore income tax effects.)

1. Compute the payback period of the new machine.
2. Compute the internal rate of return.
3. Interpretive Question: What uncertainties are involved in this decision? Discuss how they might be dealt with.

Solution Preview

First two parts are attached in the excel file,

3. Interpretive Question: What uncertainties are involved in this decision? Discuss how they might be dealt with.

The investment decisions of a firm ...

Solution Summary

This solution explains how to determine payback period and internal rate of return for Kitchen Shop with formula, calculations, answers and discussion. The interpretive question can be found in 117 words in the response section with a reference whilst the rest is in an Excel attachment.

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