Question
In: Accounting
Problem 9-29 Grouper Fashions needs to replace a beltloop attacher that currently costs the company $45,000...
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?
Solutions
Expert Solution
| 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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