Prince Company's Required Rate of Return Is 10

question 90

Essay

Prince Company's required rate of return is 10%.The company is considering the purchase of three machines,as indicated below.Consider each machine independently. (Ignore income taxes in this problem.)B.c)Investment required/Net annual cash flow = Factor of the internal rate of return
Required:
a)Machine A will cost $25,000 and will have a useful life of 15 years.Its salvage value will be $1,000,and cost savings are projected at $3,500 per year.Calculate the machine's net present value.
b)How much should Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years?
c)Machine C has a projected life of ten years.What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to Prince Company to purchase Machine C? Explain.

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Definitions:

Net Income

The net earnings of a company following the deduction of all costs, such as taxes and operational expenses, from its total income.

Limited Life

A feature of certain business entities where the business has a defined end date or event upon which it will dissolve.

Unlimited Liability

A legal obligation where a business owner or partner is personally responsible for all of the debts of the business.

Mutual Agency

A business principle where each partner in a partnership can act on behalf of the partnership, binding it contractually.