Question

Problem 9-29

Grouper Fashions needs to replace a beltloop attacher that currently costs the company $45,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,220. Managers have identified a potential replacement machine, Euromat’s Model HD-435.

The HD-435 is priced at $47,547 and would cost Grouper Fashions $35,000 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.

Click here to view the factor table.

(a) Calculate the net present value of purchasing the HD-435, assuming Grouper Fashions uses a 16% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 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

years

(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 Grouper Fashions purchase the HD-435?

Answer 1

	Cost of New machine	47,547
	Less: Salvage value of old machine	2,220
	Initial Investment	45,327
(a.)	Net present value of purchasing the HD-435
	Annual cash operating cost of old mahine	45,000
	Less:Annual cash operating cost of new mahine	35,000
	Annual Saving in operating cost	10,000
	Year	Annual Saving	Present Value factor @16%	Present Value
	1	10,000	0.862069	8,621
	2	10,000	0.743163	7,432
	3	10,000	0.640658	6,407
	4	10,000	0.552291	5,523
	5	10,000	0.476113	4,761
	6	10,000	0.410442	4,104
	7	10,000	0.353830	3,538
	8	10,000	0.305025	3,050
	9	10,000	0.262953	2,630
	10	10,000	0.226684	2,267
	11	10,000	0.195417	1,954
	12	10,000	0.168463	1,685
	13	10,000	0.145227	1,452
	Total	130,000		53,423
	Present value of saving in operating cost	53,423
	Less: Initial Investment	45,327
	Net Present Value	8,096
(b.)	Internal rate of return on the HD-435
	At IRR, Net present value will 0.
	At 20% , present value of saving in operating cost is 45,327, Hence NPV is 0 (45,327 - 45,327 )at 20%.
	So, Internal rate of return is 20% .
	Year	Annual Saving	Present Value factor @20%	Present Value
	1	10,000	0.833333	8,333
	2	10,000	0.694444	6,944
	3	10,000	0.578704	5,787
	4	10,000	0.482253	4,823
	5	10,000	0.401878	4,019
	6	10,000	0.334898	3,349
	7	10,000	0.279082	2,791
	8	10,000	0.232568	2,326
	9	10,000	0.193807	1,938
	10	10,000	0.161506	1,615
	11	10,000	0.134588	1,346
	12	10,000	0.112157	1,122
	13	10,000	0.093464	935
	Total	130,000		45,327
(c.)	Payback period of the HD-435
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