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    Payback and Internal Rate of Return

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    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.

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    Solution Preview

    1. Payback period is the period in which the cash outflows are recovered

    in $
    Cash Outflow 41595

    Cash inflow 8000 per annum for 12 years
    (Here cash inflows are in nature of annuity as they are ...

    Solution Summary

    Payback and Internal Rate of Return are featured.