Ayayai Fashions needs to replace a beltloop attacher that currently costs the co

Question

Ayayai Fashions needs to replace a beltloop attacher that currently costs the company $41,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,230. Managers have identified a potential replacement machine, Euromat's Model HD-435 The HD-435 is priced at $54,201 and would cost Ayayai Fashions $31,000 in annual cash operating costs. The machine has a useful life of 12 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 Ayayai Fashions uses a 14% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to o0 decimal place, e.g. 58,971.) Net present value (b) Calculate the internal rate of return on the HD-435 Internal rate of return (c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.) Payback period (d) Calculate the accounting rate of return on the HD-435. (Round answer to 2 decimal places, eg, 11.25%.) Accounting rate of return (e) Should Ayayai Fashions purchase the HD-435? years

Explanation / Answer

(a).Net Present Value of Purchases = 54201 + (31000*5.6603) =54201+ 175469 = $ 229,670

(5.6603 is Cumulative Discounting Factor [(1/1.14)+(1/1.14^2) ..........(1/1.14^12)] )

(b). Net Saving in Cost is (41000-31000) = 10,000  

Internal rate of return factor = Net annual cash inflow/Investment required

= 54201/10000 =5.4201

Now see internal rate of return factor (5.4201) in 12 year line of the present value of an annuity if $1 table.

After finding this factor, see the corresponding interest rate written at the top of the column. It is 15%. Internal rate of return is, therefore, 15%.

(c).Payback Period = Initial Investment / Annual Cash Flow = 54201/10000 = 5.42 Yers

(Annual Cash Flow is Saving in Cost = 41000-31000 = 10000)

(d) Accounting rate of return = Average savings / Average Investment = 10000/54201*100 = 18.45%

(e) NPV if company uses same machinery = (41,000 *5.6603) - (2230*0.2076)

(Assuming Discount rate of 14% so Cumulative Discounting factor of 14% for 12 year is 5.6603 and for 12th year is 0.2076)

=232071.98-462.85 = 231,609

and from answer(a) we got NPV for purchasing HD-435 is 229670

So there is a saving of 231609-229670 = 1939.00

Therefore , Ayayai Fashions Should Purchase HDR-435.

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