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 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%.)

(e) Should Ayayai Fashions purchase the HD-435?

Explanation / Answer

Req a: NPV at 14% Present value of annual savings in cost 56600 ($ 10000 * Present Annuity factor of 14% i.e. 5.66) Less: Initial Investment (54201-2230) 51971 Net present value 4629 Req b: Internal rate of return: NPV at 18% Present value of annual savings in cost 47930 ($ 10000 * Present Annuity factor of 18% i.e. 4.793) Less: Initial Investment (54201-2230) 51971 Net present value -4041 IRR: Lower rate+ (NPV at lower rate/ difference in NPV) * Difference in rates 14% + (4629 / 8670) *4% = 14% +2.14 % = 16.14% Req C: Payback period: Net investment/ Annual cash inflows = 51971 /10000 =5.2 years Req D: Annual cash inflows: 10000 Less: Incremental dep (54201-41000)/12 1100 Nnet income 8900 Average Increase in investment (54201/2) 27100.5 Accounting rate of return: Net Income increase / Average Investment = 8900 /27100*100 = 32.84% Req E: Yes.

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