Redman Company Is Considering an Investment in New Machinery

question 62

Essay

Redman Company is considering an investment in new machinery. The details of the investment are as follows:
The company uses straight-line depreciation for its machinery and requires a 12% rate of return. The present value of $1 for 4 years at 12% is 0.636. The present value of an ordinary annuity for $1 for 4 years at 12% is 3.037.
(1) What is the payback period?
(2) What is the rate of return?
(3) What is the net present value?
(4) Would you advise the company to invest in this machinery?
$\begin{array}{lr}\text { Cost of the machinery } & \$ 250,000 \\\text { Annual cash flows } & \$ 75,000 \\\text { Useful life } & 4 \text { years } \\\text { Residual value } & \$ 25,000\end{array}$

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