Garrett Boone, Farish Enterprises’ vice president of operations, needs to replac

Question

Garrett Boone, Farish Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $289,495 and will last for 8 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $37,100 per year. He also believes the lathe will reduce energy costs by $28,350 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,206. Click here to view the factor table. (a) Calculate the lathe’s internal rate of return.

Explanation / Answer

Cost       289,495 sale of old machine            5,206 Net cost       284,289 life                    8 salvage value                   -   Depreciaiton    36,186.88 Reduction in raw material scrap          37,100 reduction in energy cost          28,350 Total savings          65,450 Less: depreciation          36,187 Net savings          29,263 IRR 10.29%

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