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Question: Southern Cola is considering the purchase of


Southern Cola is considering the purchase of a special-purpose bottling machine for $23,000. It is expected to have a useful life of four years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs:

Year…………………………….Amount
1 ……………………………………….$10,000
2 …………………………………………..8,000
3. ………………………………………….6,000
4……………………………………………5,000
Total ………………………………….$29,000

Southern Cola uses a required rate of return of 16% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts.

Required:
Calculate the following for the special-purpose bottling machine:
1. Net present value.
2. Payback period.
3. Internal rate of return.
4. Accrual accounting rate of return based on net initial investment. (Assume straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)


2.99

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