Question

Whispering Winds Fashions needs to replace a beltloop attacher that currently costs the company $48,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $3,500. Managers have identified a potential replacement machine, Euromat’s Model HD-435.

The HD-435 is priced at $47,892 and would cost Whispering Winds Fashions $38,000 in annual cash operating costs. The machine has a useful life of 12 years, and it is not expected to have any salvage value at the end of that time.


(a) Calculate the net present value of purchasing the HD-435, assuming Whispering Winds 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)

Accounting rate of return

%

(e) Should Whispering Winds Fashions purchase the HD-435?

Yes / No

Answer 1

a)

Net Present Value
	Calculation Of NPV
a	Investment	$             44,392
b	annual cash inflow	$             10,000
c	PV annuity factor for 12 years and 16 %	5.1971
d	PV of Annual Cash Inflow (b*c)	$             51,971
e	Salvage Value	0
f	PV factor of year 12	0.16846
g	PV Of Salvage Value	0
h	Net Present Value (d+g-a))	$                7,579

b) IRR = 20%

( using excel function)

c)

Payback Period:
Payback period = Initial Investment / Annual Cash Flow
= $44392 /10000
= $4.44 years

d)

Accoutning Rate Of Return (ARR):
Annual Depreciaiton =Cost - Salvage Value / Life of Asset
= ( $44392 -0 ) /12 years
= $ 3699.33 per year
Annual Net Income = Annual Cash Flow - Depreciation
= $10000-3699.33
= $6300.67
Average Investment = (Intial Investment + Salvage Value )/2
= ( $44392 + 0 ) / 2
= $ 22196
Accounting Rate Of Return = Net Income / Average Investment
= $6300.67 /22196
= $28.39 %