New Lathe The ACE Manufacturing company expects to buy a new lathe which will ha

Question

New Lathe

The ACE Manufacturing company expects to buy a new lathe which will have a lifetime of five years. The lathe will cost $10,000. and will produce an annual income of $2,500 per year throughout its lifetime. It is anticipated that the cost of removal of the lathe will exceed its value as scrap at the end of the useful life of $2,500. MARR and the external rate of return are both assumed to be 10%.
1. Calculate the internal rate of return for this investment. (express your answer to the nearest 1/10 %, XX.X) (Points : 10)

2. Calculate the payback period for this investment. (Report your answer to the closest 1/10 year.) (Points : 5)

Explanation / Answer

1. price = 10000$
annula revenue = 2500
period = very long
salvage = nil

NPV=0 = -10000 + 2500((1+i)^1000 -1 )/(i(1+i)^1000)
( i assume time = 1000, usually considered very long)
IRR = i = 25.2 %

2 payback period

0= -10000 + 2500((1+.252)^T -1 )/(.252(1+.252)^T)

solve for T=approx = 90 years
PLEASE RATE

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