Concord Fashions needs to replace a beltloop attacher that currently costs the c

Question

Concord Fashions needs to replace a beltloop attacher that currently costs the company $39,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,260. Managers have identified a potential replacement machine, Euromat's Model HD-435 The HD-435 is priced at $58,945 and would cost Concord Fashions $29,000 in annual cash operating costs. The machine has a useful life of 16 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 Concord Fashions uses a 12% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to O 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, e.g. 11.25%.) Accounting rate of return (e) Should Concord Fashions purchase the HD-435? years

Explanation / Answer

a) Net present value = PV of total cash inflow - Initial investment Cost of new machine = $58945 Receipts from sale of old machine = $2260 Net cost of new machine = $58945-$2260 = $56685 Annual savings in cash operating costs = $39000-$29000 = $10000 PV of total cash inflow = $10000*PVIFA @8% 13 years = 10000 * 6.974 = $69740 NPV = $69740-$56685 = $13055 b) IRR can be calculated by using trial and error method NPV using 12% discounting rate = $13055 NPV using 18% discounting rate = $51623($10000*5.1623)-$56685 = -5062 IRR = Lower rate + ((NPV at lower rate-required NPV)/(NPV at lower rate-NPV at higher rate))*(higher rate-lower rate) = 12 + ((13055-0)/(13055--5062))*(18-12) = 12+(13055/18117)*6 = 12+0.72*6 = 12+6 = 16% (approx) c) Pay back period = Net initial investment / annual operating cash flow = 56685/10000 = 5.67 years d) Accounting rate of return = Average return during period / Average investment Average investment = (Book value at the beginning+Book value at the end)/2 = (56685+0)/2 = $35517 Average return during the period = Increamental revenue (including depreciation) = $10000+(58945/16) = $13684 ARR = $13684/$28343 = 48.3% e) yes. Because the NPV is positive and good ARR also

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