Company ADS must decide whether to purchase a piece of factory equipment for 570

Question

Company ADS must decide whether to purchase a piece of factory equipment for 570,000 TL. The equipment would only last six years, but it is expected to generate 130,000 TL of additional annual profit during those years. Company ADS also thinks it can sell the equipment for scrap afterward for about 87,000 TL. The The company uses a minimum attractive rate of return of 10%. a) What is the capital recovery of this equipment? b) What is the AW of this equipment? c) Would you purchase the equipment based on the AW you calculated in (a)? d) What is the IRR of this equipment? e) Would you purchase the equipment based on the IRR you calculated in (c)?

Explanation / Answer

Capital recovery = -Intial investment + salvage value (Both are converted to annual amounts)

AW = CR + profits

CR = -570000*PMT(10%,6,-1) + 87000*PMT(10%,6, ,-1)

   = -570000*0.23 + 87000*0.13

   = -119600.36

AW = -119600.36 + 130000

   = 10399.64

Yes would have purchased

d)

final year cashflow = 130000 + 87000 = 217000

IRR = IRR({-570000, 130000, 130000, 130000, 130000, 130000, 217000})

= 12.49%

e)

Yes, because IRR is higher than required return of 10%

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