The Susan Company is debating if they should purchase a new machine for its factory operations at a cost of $745,200. The investment is expected to generate $150,000 in annual cash flows for a period of eight years. The required rate of return is 10%. The old machine has a remaining life of eight years. The new machine is expected to have zero value at the end of the eightminus-year period. The disposal value of the old machine at the time of replacement is zero. (Click the icon to view the Future Value of $1 factors.) (Click the icon to view the Future Value of Annuity of $1 factors.) E(Click the icon to view the Present Value of $1 factors.) (Click the icon to view the Present Value of Annuity of $1 factors.) Requirement 1: What is the Internal Rate of Return of this investment that Susan Company is making? O A. 14% O B. 8% Oc. 10% O D. 12% Requirement 2: Should Susan Company purchase the new machine? Why? O A. Yes, as the internal rate of return is more than their required rate of return O B. There is no way to tell if they should make this investment just based on the Internal Rate of Return OC. No, as the internal rate of return is less than their required rate of return O D. Yes, as the internal rate of return is the same as their required rate of return
The Susan Company is debating if they should purchase a new machine for its factory operations at a cost of $745,200. The investment is expected to generate $150,000 in annual cash flows for a period of eight years. The required rate of return is 10%. The old machine has a remaining life of eight years. The new machine is expected to have zero value at the end of the eightminus-year period. The disposal value of the old machine at the time of replacement is zero. (Click the icon to view the Future Value of $1 factors.) (Click the icon to view the Future Value of Annuity of $1 factors.) E(Click the icon to view the Present Value of $1 factors.) (Click the icon to view the Present Value of Annuity of $1 factors.) Requirement 1: What is the Internal Rate of Return of this investment that Susan Company is making? O A. 14% O B. 8% Oc. 10% O D. 12% Requirement 2: Should Susan Company purchase the new machine? Why? O A. Yes, as the internal rate of return is more than their required rate of return O B. There is no way to tell if they should make this investment just based on the Internal Rate of Return OC. No, as the internal rate of return is less than their required rate of return O D. Yes, as the internal rate of return is the same as their required rate of return
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:The Susan Company is debating if they should purchase a new machine for its factory operations at a cost of $745,200. The investment is expected to generate $150,000 in annual cash flows for a period of eight years. The required rate of return is 10%.
The old machine has a remaining life of eight years. The new machine is expected to have zero value at the end of the eightminus-year period. The disposal value of the old machine at the time of replacement is zero.
(Click the icon to view the Future Value of $1 factors.)
(Click the icon to view the Future Value of Annuity of $1 factors.)
(Click the icon to view the Present Value of $1 factors.)
(Click the icon to view the Present Value of Annuity of $1 factors.)
Requirement 1: What is the Internal Rate of Return of this investment that Susan Company is making?
O A. 14%
В. 8%
С. 10%
D. 12%
Requirement 2: Should Susan Company purchase the new machine? Why?
O A. Yes, as the internal rate of return is more than their required rate
return
B. There is no way to tell if they should make this investment just based on the Internal Rate of Return
C. No, as the internal rate of return is less than their required rate of return
D. Yes, as the internal rate of return is the same as their required rate of return
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