XZY Inc. plans to purchase a new machine. The machine costs $200,500 and is expected to have a useful life of 8 years, with a residual value of $37,500. Savings in cash operating costs are expected to be $50,000 per year. However, additional working capital of $10,000 is needed to keep the machine running efficiently. This working capital will be released at the end of the project. XZY Inc.'s required rate of return is 14%. Required: a) What is the project's payback? If XZY Inc. has a policy of only accepting projects that payback within 3 years, would this project be accepted? b) Calculate the net present value of this project and make a recommendation to XZY Inc. as to whether they should purchase the machine.

XZY Inc. plans to purchase a new machine. The machine costs $200,500 and is expected to have a useful life of 8 years, with a residual value of $37,500. Savings in cash operating costs are expected to be $50,000 per year. However, additional working capital of $10,000 is needed to keep the machine running efficiently. This working capital will be released at the end of the project. XZY Inc.'s required rate of return is 14%. Required: a) What is the project's payback? If XZY Inc. has a policy of only accepting projects that payback within 3 years, would this project be accepted? b) Calculate the net present value of this project and make a recommendation to XZY Inc. as to whether they should purchase the machine.

Name: XZY Inc. plans to purchase a new machine. The machine costs $200,500
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Description: XZY Inc. plans to purchase a new machine. The machine costs $200,500 and is expected to have a useful life of 8 years, with a residual value of $37,500. Savings in cashoperating costs are expected to be $50,000 per year. However, additional working

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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