Question

Magenta Inc. is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment: Old Equipment New Equipment Cost $81,120 Cost $38,800 Accumulated depreciation $40,700 Estimated useful life 8 years Remaining life 8 years Salvage value in 8 years $4,800 Current salvage value $10,180 Annual cash operating costs $29,900 Salvage value in 8 years $0 Annual cash operating costs $35,300 Depreciation is $10,140 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value of $4,800.

(a) Your answer is correct. Determine the cash payback period. (Ignore income taxes.) (Round answer to 3 decimal places, e.g. 15.275.) Cash payback period years SHOW SOLUTION LINK TO TEXT LINK TO TEXT LINK TO TEXT By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor. Attempts: 1 of 3 used

(b) Your answer is correct. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.) Annual rate of return % SHOW SOLUTION LINK TO TEXT LINK TO TEXT LINK TO TEXT By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor. Attempts: 2 of 3 used

(c) Your answer is incorrect. Try again. Calculate the net present value assuming a 15% rate of return. (Ignore income taxes.) (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.) Click here to view PV table. Net present value $

Answer 1

1. Determine the cash payback period

cost of replacement = cost of new equipment - current salvage value

cost of replacement = 38800 - 10180 = 28620

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Net annual cash flow = savings in cash operating costs = 35300 - 29900 = 5400

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payback period = cost of replacement / net annual cash flow

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payback period = 28620 / 5400 = 5.3 years

B. Calculate the annual rate of return

calculate the annual rate of return = Net annual cash flow / cost of replacement

calculate the annual rate of return = 5400 / 28620 = 18.87%

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annual rate of return = 18.87%

C. Calculate the net present value assuming a 15% rate of return.

NPV Year	CASH FLOWS	PV FACTOR	PV OF CASH FLOWS
0	(28620)	1	(28620)
1	5400	0.86956	4695.624
2	5400	0.75614	4083.156
3	5400	0.65752	3518.208
4	5400	0.57175	3087.45
5	5400	0.49717	2684.718
6	5400	0.43233	2334.582
7	5400	0.37594	2030.076
8	10200	0.32691	3334.482

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NPV= sum of pv of cash flow = (2581)