Allen Company's required rate of return is 12%. The company is considering the purchase of three machines as indicated below. Consider each machine independently.
Required:
a. Machine A will cost $15,000 and have a life of 8 years. Its salvage value will be $1,000 and cost savings are projected at$3,000 per year. Compute the machine's net present value.
b. How much would Allen Company be willing to pay for Machine B if the machine promises annual cash inflows of $6,000 per year for 10 years?
c. Machine C has a projected life of 12 years. What is the machine's internal rate of return, to the nearest whole percent, if it costs $18,000 and will save $2,500 annually in cash operating costs? Would you recommend purchase? Explain.