Farrior Fashions needs to replace a beltloop attacher that currently costs the c
ID: 2483808 • Letter: F
Question
Farrior Fashions needs to replace a beltloop attacher that currently costs the company $45,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,220. Managers have identified a potential replacement machine, Euromat’s Model HD-435. The HD-435 is priced at $47,547 and would cost Farrior Fashions $35,000 in annual cash operating costs. The machine has a useful life of 13 years, and it is not expected to have any salvage value at the end of that time. Click here to view the factor table.
(a) Calculate the net present value of purchasing the HD-435, assuming Farrior Fashions uses a 16% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)
(b) Calculate the internal rate of return on the HD-435.
(c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.)
(d) Calculate the accounting rate of return on the HD-435. (Round answer to 2 decimal places, e.g. 11.25%.)
Explanation / Answer
Cost of new Machine $47,547 Less: salvage value of old machine $2,220 net cost to be paid $45,327 Operating cost of old Machine $45,000 Less: Operating cost of new machine $35,000 Net saving in operating expense $10,000 (a) Calculate the net present value of purchasing the HD-435, assuming Farrior Fashions uses a 16% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Year Cash Flow PV Factor @16% Present Value 0 -$45,327 1.00000 -$45,327 1 $10,000 0.86207 $8,621 2 $10,000 0.74316 $7,432 3 $10,000 0.64066 $6,407 4 $10,000 0.55229 $5,523 5 $10,000 0.47611 $4,761 6 $10,000 0.41044 $4,104 7 $10,000 0.35383 $3,538 8 $10,000 0.30503 $3,050 9 $10,000 0.26295 $2,630 10 $10,000 0.22668 $2,267 11 $10,000 0.19542 $1,954 12 $10,000 0.16846 $1,685 13 $10,000 0.14523 $1,452 Net Present Value $8,096 (b) Calculate the internal rate of return on the HD-435. Year Cash Flow 0 -$45,327 1 $10,000 2 $10,000 3 $10,000 4 $10,000 5 $10,000 6 $10,000 7 $10,000 8 $10,000 9 $10,000 10 $10,000 11 $10,000 12 $10,000 13 $10,000 IRR 20.00% (c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.) Year Cash Flow Cumulative Cash Flow 0 -$45,327 -$45,327 1 $10,000 -$35,327 2 $10,000 -$25,327 3 $10,000 -$15,327 4 $10,000 -$5,327 5 $10,000 $4,673 Pay back Period 4.5 years (d) Calculate the accounting rate of return on the HD-435. (Round answer to 2 decimal places, e.g. 11.25%.) Initial Investment $45,327 Annaul cash flow $10,000 Less: Depriciation $3,486.69 net Income $6,513.31 Accounting rate of return 14.37%
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