SIFT company is contemplating the purchase of a large piece of machinery for $80000. SIFT anticipates that the machine will have a six year life; have annual cash inflows of $20000 and a salvage value (at end year six) 0f $10000. SIFT assigns a cost of capital or minimum rate of return of12% for the project. Ignore income taxes.
a) What is the payback period?
b) What is the internal rate of return? (note: for part [b] ONLY, ignore salvage value)
c) What is the net present value? A table is provided below:
YEARS EVENT AMOUNT PV FACTOR PRESENT VALUE
_______________NET PRESENT VALUE________________
d) What is the present value index?
e) Based on your answers to [c] ands [d], should SIFT buy the machinery? Why or why not?