Question

Problem 13.29A a-d (Part Level Submission)

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		$80,800		Cost		$38,600
Accumulated depreciation		$40,400		Estimated useful life		8 years
Remaining life		8 years		Salvage value in 8 years		$4,600
Current salvage value		$10,440		Annual cash operating costs		$30,200
Salvage value in 8 years		$0
Annual cash operating costs		$36,000

Depreciation is $10,100 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 $4,600.

Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.)

Calculate the net present value assuming a 18% rate of return

Should the company purchase the new equipment?

Answer 1

1	Annual rate of return	Average Annaul Profit
Initial Investment
		5800	*100
		12240
		47.38%
2	net present value	Cash inflow less	Cash Outflow
	24873.66	-12240	37113.66
Working	Using Incremental approch
	Cash Outflow
		Old Equipment	New Equipment
	Book Value	40400	38600
	Current salvage value	10,440	0
		50840	38600	12240
	Cash Inflow	Old Equipment	New Equipment	Saving in cost
	Annual cash operating costs	-36000	-30200	5800
	Salvage Value	0	4600	4600
	Year	Discount Factor @ 18%	Saving in cost	Present Value
	1	0.8475	5800	4915.25
	2	0.7182	5800	4165.47
	3	0.6086	5800	3530.06
	4	0.5158	5800	2991.58
	5	0.4371	5800	2535.23
	6	0.3704	5800	2148.50
	7	0.3139	5800	1820.77
	8	0.2660	10400	2766.80
				24873.66

Yes Compnay would purchase as positive NPV