Levin Company Is Considering Two New Machines That Should Produce $\text { Annulual After-tax Cash Savings }$

question 82

Essay

Levin Company is considering two new machines that should produce considerable cost savings in its assembly operations.The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a 4-year useful life.Levin's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life.The annual after-tax cash savings for each machine is provided in the following table:
$\text { Annulual After-tax Cash Savings }$
$\begin{array} { l l c } \text { Year } & \text { Machine A } & \text { Machine B } \\1 & \$ 5,000 & \$ 8,000 \\2 & 5,000 & 6,000 \\3 & 5,000 & 4,000 \\4 & \underline{5,000 }& \underline{2,000} \\\text { Total } & \underline{\$ 20,000} & \underline{\$ 20,000}\end{array}$ (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Compute the payback period for each machine using the incremental approach and comment on the results.
2)Compute the unadjusted rate of return based on average investment for each machine.The machines will be depreciated on a straight-line basis.
3)Compute the net present value for each machine.
4)Which machine would you recommend? Explain your reasoning.
5)Use the present value table to compute the approximate internal rate of return for Machine A.

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Definitions:

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