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Using Payback, Net Present Value, and Internal Rate of Return Methods to Analyze a purchase

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Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000. The machine should save the company approximately $70,000 in operating costs per year over its estimated useful life of 10 years. The salvage value at the end of 10 years is expected to be $15,000. (Ignore income tax effects.)

Required:
1. What is the machine's payback period?
2. Compute the net present value of the machine if the cost of capital is 12%.
3. What is the expected internal rate of return for this machine?

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Solution Summary

Computations shown manually and in excel.

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Hello!
The cash flow from this purchase can be written as:

Year 0 -$ 370,000
Year 1 $ 70,000
Year 2 $ 70,000
Year 3 $ 70,000
Year 4 $ 70,000
Year 5 $ 70,000
Year 6 $ 70,000
Year 7 $ 70,000
Year 8 $ 70,000
Year 9 $ 70,000
Year 10 $ 85,000

I'm assuming here, for simplicity, that the $70,000 savings is realized at the end of each year. Notice that the cash flow in the last ...

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