Garrett Boone, Farish Enterprises’ vice president of operations, needs to replac
ID: 2462678 • Letter: G
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 $280,203 and will last for 10 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 $37,700 per year. He also believes the lathe will reduce energy costs by $27,850 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,385. Click here to view the factor table.
(a) Calculate the lathe’s internal rate of return. Internal rate of return $ %
(b) If Farish Enterprises uses a 16% hurdle rate, should Garrett purchase the lathe?
Explanation / Answer
Answer:(a) Saving in cost=Saving in raw material cost+Saving in energy cost
=$37700+$27850
=$65550
Cost of Model=280203
Sale of old lathe=5385
Net cost=280203-5385=274818
Calculation of IRR:
Answer:(b)
Yes, Garrett should purchase the lathe because NPV is positive.
Particulars Year Cash Flow ($) Net cost 0 -274818 Saving in cost 1 65550 2 65550 3 65550 4 65550 5 65550 6 65550 7 65550 8 65550 9 65550 10 65550 IRR 20%Related Questions
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