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Fordem Co

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Fordem Co.

Fordem Co. is considering an investment in a machine that would reduce annual labor costs by $30,000. The machine has an expected life of 10 years with no salvage value. The machine would be depreciated according to the straight-line method over its useful life. The company's marginal tax rate is 30 percent.

  1.   Refer to Fordem Co. (Present value tables needed to answer this question.) Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent. What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion?

  2.   Refer to Fordem Co. (Present value tables needed to answer this question.) Assume the company pays $250,000 for the machine. What is the expected internal rate of return on the machine?