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

Question

Culver 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 $2,360. Managers have identified a potential replacement machine, Euromat's Model HD-435. The HD-435 is priced at $66,984 and would cost Culver Fashions $28,000 in annual cash operating costs. The machine has a useful life of 15 years, and it is not expected to have any salvage value at the end of that time. For ca de ma piac sasd played in a) calculate the net present value of purchasing the HD-435, assuming C the factor table provided and round final answer to o decimal place, e.g. 58,971.) ulat n p r o es, use eg.rashions uses a 11% discount rate.. 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 years (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 Culver Fashions purchase the HD-435?

Explanation / Answer

a) Here, the initial cost = 66,984 - 2,360 = 64,624

Annual savings = 38,000 - 28,000 = 10,000

NPV can be calculated using PV function on a calculator

N = 15, PMT = 10,000, I/Y = 11%, FV = 0 => Compute PV = $71,908.70 is the present value of future cash flows

NPV = 71,908.70 - 64,624 = $7,284.70

b) IRR can be calculated using I/Y function

N = 15, PMT = 10,000, PV = -64,624, FV = 0 => Compute I/Y = 13.00%

c) Payback period is the no. of years it take to recover the initial investment.

Payback Period = Investment / Cash Flows = 64,624 / 10,000 = 6.46 years

d) Accounting rate of return (ARR) = Net Income / Investment = 10,000 / 64,624 = 15.47%

e) Yes because the NPV > 0 and IRR > discount rate of 11%

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