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E12-6 BSU Inc. wants to purchase

Price: $1.99


E12-6 BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of
installation costs. The old machine was bought five years ago and had an expected
economic life of 10 years without salvage value. This old machine now has a book value
of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would
decrease operating costs by $7,000 each year of its economic life. The straight-line
depreciation method would be used for the new machine, for a six-year period with no
salvage value.

Instructions
(a) Determine the cash payback period.
(b) Determine the approximate internal rate of return.
(c) Assuming the company has a required rate of return of 10%, state your conclusion on
whether the new machine should be purchased

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