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.)
