Question Bramble Fashions needs to replace a beltloop attacher that currently co

Question

Question Bramble Fashions needs to replace a beltloop attacher that currently costs the company $38,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,090. Managers have identified a potential replacement machine, Euromat's Model HD-435 The HD-435 is priced at $73,124 and would cost Bramble Fashions $28,000 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 (a Calculate the net present value of purchasing the HD-435, assuming Bramble Fashions uses a 8% 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 Bramble Fashions purchase the HD-435? years

Explanation / Answer

a) Statement showing NPV

b) Statement showing IRR

IRR is the rate at which NPV is o

At 10% NPV is 0 hence IRR = 10%

C) Pay back period = Initial investment / Savings in cost

=73124-2090/10000

=71034/10000

=7.1034 Years

D) Accounting rate of return = Savings in cost/initial investment

=10,000/71034

=14.077%

E) Since NPV is positive one should purchase HD-435

Particulars Amount Savings in annual cost (38000-28000) 10000 PVIFA(8%,13 years) 7.90376 PV of cash inflow 79037.6 Less: Initial investment (73124-2090) 71034 NPV 8003.6

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